NBT Bancorp Inc.

Good day, everyone. Welcome to the NBT Bancorp second 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. 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.

Thank you, Josh, and good morning, everyone. Thank you for participating in this earnings call covering NBT Bancorp's second quarter 2022 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, and our Chief Accounting Officer, Annette Burns. We are extremely pleased with our results for the second quarter of 2022, including earnings per share of 88 cents, ROA of 128, and an ROA TCE of 17%. I'd like to take a moment here to highlight activity in our businesses. Loan growth continued to be strong. Our commercial business generated 310 million in loan originations. an increase of 24% over the last quarter. You know, it's clear to us that our commercial and small business customers continue to successfully navigate the challenging operating environment in the face of supply chain issues and inflation, and NBT is there to support them. The second quarter performance of our SunGage residential solar partnership is also notable. Originations were strong in the quarter, and credit quality continues to be pristine. Our fee-based businesses continued their strong performance with total non-interest income at nearly 33 percent of total revenue for the second quarter. Although we are very mindful that the forward environment is likely to be volatile, through six months we observe a very strong consumer. Balances in personal checking accounts grew in the second quarter, and credit quality in consumer loan portfolios is very healthy. Delinquency across all consumer loan categories is below pre-pandemic levels. I'm happy this morning to report that at a meeting yesterday, our board of directors approved a 7% increase in the dividend, or two cents a share, to 30 cents, making this our 10th consecutive year of annual dividend increases. As we head into the back half of the year and the potential for increased levels of uncertainty and volatility, we are well positioned with strong liquidity and capital levels, a diversified business mix, a highly effective risk management practice, and a team of experienced professionals. So with that said, Scott, I'm going to turn it over to you to talk in greater detail with respect to our financial performance. And following Scott's remarks, we're happy to take your questions.

Thank you, John, and good morning, everyone. Turning to the results overview on page four of our earnings presentation, our second quarter earnings per share was $0.88, which was down from $0.92 a share reported in the second quarter of 2021 and $0.02 a share lower than the first quarter of 2022. These results were achieved despite a $3.4 million decline, or six cents a share, in PPP income recognition compared to the second quarter of last year, and a $700,000 decline in PPP income from the first quarter of 2022. The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth, productive incremental deployment of a portion of our excess liquidity into investment securities, increases in the federal reserve's targeted fed funds rate and the continuation of historically low funding costs we recorded a loan loss provision expense of 4.4 million dollars in the second quarter compared to a provision benefit of 5.2 million dollars in the second quarter of 2021 or a 17 cent per share swing and a provision expense of 600 000 in the first quarter of 2022. Net charge-offs in the second quarter were $800,000, or four basis points of loans, compared to seven basis points of loans in the second quarter of 2021, and 14 basis points of net charge-offs in the linked first quarter. Our reserve coverage increased slightly to 1.21% of loans from 1.18% at the end of March. The next slide, page five, shows trends in outstanding loans. On a core basis, excluding PPP, loans were up $162 million for the quarter and included growth in both our consumer and commercial portfolios. Our total PPP balances as of June 30th were down to just over $17 million. With forgiveness almost complete for both the 2020 and 2021 vintage loans, we recognized $1.3 million of interest and fees associated with PPP lending during the quarter and and we have just $400,000 in unamortized fees remaining. Excluding PPP recognition, loan yields were 16 basis points up from the first quarter of 2022, reflective of higher yields on our variable rate portfolios, as well as higher new volume rates. Moving to the slide on deposits, we were down $433 million from the end of the first quarter, which was a result of a $100 million broker deposit maturity within the quarter, as well as seasonal declines in municipal deposits. The matured broker deposit was the last of our wholesale funding, which we secured in the early and uncertain days of the pandemic. Our quarterly cost of deposits remained flat at seven basis points, and we continued to add new accounts. The next slide looks at the detailed changes in our net interest income and margin. Net interest income increased $8.4 million as compared to the second quarter of last year, and up $7.2 million from the first quarter of 2022, reflective of higher yields on earning assets. Reported second quarter net interest margin was 3.21%, up 26 basis points from the first quarter of 2022, and up 21 basis points from the second quarter of 2021. Looking forward, with interest rates rising, the yields on our variable rate earning assets are expected to continue to move higher. We also expect to reinvest our loan and securities portfolio cash flows at levels above current blended portfolio yields, and as such, we would expect to see more opportunities for additional core margin improvement. Although we believe our deposit funding profile is best in class, we would expect some level of deposit beta to be present in the beginning beginning in the third quarter. Our balance sheet still continues to exhibit a meaningful level of asset sensitivity. Moving to the trends in non-interest income on page 8, excluding securities gains and losses, our fee income was up 8% from the second quarter of 2021 to $42.2 million, but lower by $600,000 from the linked first quarter. More broadly, non-spread revenue was 33% of our total revenue in the second quarter of 2022, and remains a key strength and value driver for NBT. Our retirement plan administration businesses experienced strong year-over-year growth, driven by higher activity-based revenues and continued organic growth. Wealth management fees were lower than the linked first quarter, as well as the second quarter of 2021, due primarily to market performance. Banking fees improved almost 11% from the second quarter of 2021, driven by both higher card-related income and service charges. As a reminder, the bank is subject to the provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter, 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 seven cents a share. Turning to non-interest expense, our total operating expenses were $76.1 million for the quarter, which was $4.7 million, or 6.6% above the second quarter of 2021. Salaries and employee benefit costs of $46.7 million were up 9.5% over the prior year and included merit-related salary increases, as well as higher performance-based incentive compensation and increased medical expenses. Total operating expenses were also higher than the linked first quarter of 2022, reflective of one additional payroll day, annual merit pay increases, which we process annually in March, and higher medical costs. We'd expect core operating expenses to drift modestly upward over the next several quarters as we continue our 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 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 four basis points of loans in the second quarter of 2022 compared to 14 basis points in the prior quarter. Both NPLs and NPAs declined again this quarter. We are continuing to benefit from our conservative underwriting, and we have been experiencing higher than historical levels of recoveries. As I wrap up prepared remarks, a couple closing thoughts. We started 2022 on strong footing, and we are pleased with the fundamental results achieved in the first half of the year. Improving net interest income, solid results from our recurring fee income lines, and exceptional credit quality outcomes have more than offset higher levels of non-interest 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 the balance of 2022 and beyond. With that, we're happy to answer any questions you may have at this time.