NBT Bancorp Inc.

Good day, everyone. Welcome to the NBT Bank Corp's second quarter 2023 Financial Results Conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbankcorp.com. Before the call begins, MBT'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 disclosed, reconciliations for these numbers as contained within the appendix of today's presentation. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and 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 Bank Corp President and CEO, John H. Watt, Jr., for his opening remarks. Mr. Watt, please begin.

Thank you, Jonathan, and good morning, and thank you all for participating in this earnings call covering NBT Bancorp's second quarter 2023 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, and our Chief Accounting Officer, Annette Burns. There is no doubt that we entered 2Q in an environment overshadowed by volatility at the macro level, which had an impact on the banking industry. Throughout this period, NBT focused on our customers and communities, and our results demonstrate the success of this approach. By mid-quarter, we experienced higher visibility that gives us confidence about our forward momentum. Importantly, in early July, we were pleased to announce that NBT received the regulatory approvals necessary to proceed with our acquisition of Salisbury Bank. We've scheduled the closing for August 11th with a simultaneous core systems conversion. Our integration team is prepared to ensure a seamless experience for the Salisbury customers, and we are excited to welcome our new colleagues who will join NBT at that time. Let me take a moment to highlight second quarter activity across our businesses. We achieved commercial and consumer loan growth at an annualized growth rate of 5%. That growth was diverse, with our commercial lending and indirect auto businesses leading the way. Our residential solar business has moderated significantly as our planned evolution to a fee-based servicing platform commenced during the quarter. Like the rest of our industry, our cost of funds has risen as the deposit book reshuffles. In 2Q, we experienced the seasonal contraction of our municipal book as well. Nevertheless, deposits have grown since December 31, and our funding sources are robust. We have plenty of headroom to execute our 2023 plan and beyond. The full cycle deposit beta landed at 17% at the end of the quarter. We continue to enjoy high retention levels and we experienced growth in the retail deposit accounts during the course. Our fee-based businesses continued their solid performance with total non-interest income at nearly 30% of total revenue for the second quarter. In connection with our fee-based focus strategies, Epic, our national benefits record-keeping and administration firm, acquired the assets of Charlotte-based Retirement Direct on July 1. This organization adds $2 billion in client assets and over 500 individual retirement plans to the Epic base, along with a team of talented professionals. Although we are very mindful that the forward environment is likely to continue to be volatile, through six months, we observe a resilient consumer and small business owner. Credit quality at NBT remains strong and continues to perform at levels better than those we experienced prior to the pandemic. During the quarter, there were several impactful announcements along the upstate New York CHIP corridor that will drive long-term economic growth across our core markets. In the capital region, Global Foundries announced a large and strategic partnership with Lockheed Martin to produce silicon chips for use in their defense and aerospace segments. At the end of the quarter, Menlo Microsystems announced a major investment in a fab manufacturing facility in Ithaca, New York, to produce its ideal switch chips. These recent announcements are in addition to the very vibrant activity up and down the corridor this year previously discussed in our earnings calls. We anticipate continued growth and transformation of the economy in our core markets as a result. As we head into the back half of the year, NBT is on offense in part driven by the integration of Salisbury into our successful business model. We are well positioned with strong liquidity and capital levels, a diversified business mix, highly effective risk management practices, and a team of experienced professionals. Scott, I'll turn the call over to you now to talk in greater detail about our financial performance for the second quarter. And following Scott's remarks, we'll take your questions.

Thank you, John, and good morning. Turning to the results overview page of our earnings presentation, as John indicated, our second quarter earnings per share were 70 cents. Excluding the impact of acquisition expenses and securities losses, we generated earnings per share of 80 cents compared to 89 cents in the second quarter of last year and 88 cents in the linked first quarter. Despite higher levels of interest income and non-interest income, as well as lower core operating expenses, The continuation and acceleration of higher funding costs resulted in the decline in net earnings for the quarter. Tangible book value per share of $21.55 at June 30th was $0.56 higher than the second quarter of 2022 and $0.03 higher than the linked first quarter. The next page shows trends in outstanding loans. Total loans were up $94 million in the second quarter and $208 million for the year or 5.1% annualized and included growth in both our consumer and commercial portfolios. New origination yields have continued to move meaningfully higher. Our total loan portfolio of $8.36 billion remains very well diversified and is evenly balanced between consumer and commercial outstandings, reflective of customer demand in our markets. Total deposits of $9.53 million were up $34 million from the end of 2022, but were down 1.6% from the prior quarter, reflective of seasonal municipal outflows. The company continues to experience migration from its no-interest and low-interest checking and savings accounts into higher-yielding money market and time deposit instruments. Our retention of core operating relationships has remained very high, and we continue to successfully add new customers and accounts this quarter. Even though deposit balances have declined from early 2022, second quarter end 2023 deposits are 25% higher than the pre-pandemic second quarter of 2019. Our quarterly cost of total deposits increased to 85 basis points, compared to 47 basis points in the linked first quarter, and total cost of funds increased to 122 basis points in the second quarter, compared to 75 basis points in the linked first quarter. In addition, our total cost of deposits for the month of June were 92 basis points, and our total cost of funds were up to 131 basis points. We have also included a summary of our deposit mix by type which illustrates the diversification and granularity of our customer base. In addition, the appendix of the presentation we have provided an updated table of our available funding sources compared to estimated uninsured and uncollateralized deposits, which provides a coverage ratio of 158% at quarter end. The next slide looks at detailed changes in our net interest income and margin. Second quarter net interest income was $6 million below the linked first quarter results and up $1.5 million from the second quarter of 2022. Although we believe our granular deposit funding profile remains a core strength, we would expect some continued pressure on net interest margin results for at least the next couple of quarters. Retaining and growing core deposits will continue to be a critical element of our ability to manage net interest margin results. The trends in non-interest income are summarized on page 8. Excluding securities losses, our fee income was up $300,000 from the linked first quarter to $36.7 million, but was $5.6 million lower than the second quarter of 2022. Our wealth management and retirement plan administration businesses experienced productive growth and revenue generation from the first quarter of this year. Card services income increased seasonally from the linked first quarter, but declined $4.6 million from the second quarter of 2022, driven by the bank being subject to the debit interchange provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of 2022. The diversification of our revenue generation sources is a core strength of the company. Turning to non-interest expense, our total operating expenses were $77.6 million for the quarter, which was $1.5 million or 2% above the second quarter of 2022, excluding $1.2 million of merger-related expenses in the second quarter of this year. Total operating expenses were lower than the linked first quarter. Salaries and employee benefit costs of $46.8 million were 2.7% lower than the linked first quarter of due to seasonally higher payroll taxes and higher stock-based compensation expense experienced in the first quarter of 2023, as well as a lower level of incentive compensation in the current quarter. On a standalone NBT basis, we'd expect core operating expenses to be relatively consistent over the next couple of quarters, as each quarter of 2023 has the same number of payroll days. We do expect to fill many of our open positions in support of our customer engagement and growth objectives subsequent to the closing of our pending merger with Salisbury Bancorp in mid-August. We have remained deliberately conservative on staffing levels this year, understanding the opportunity that the combination with Salisbury presents. 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. Net charge-offs were 17 basis points in the second quarter of 2023 compared to 19 basis points in the prior quarter. In the selected financial data summaries provided with the earnings release, we have summarized the components of quarterly net charge-offs by line of business. Consistent with previous quarters, Second quarter net charge-offs were concentrated in our other unsecured consumer portfolios, which are in a planned runoff status, and represented 68% of total net charge-offs for the quarter. Non-performing loans to total loans were nine basis points lower than the second quarter of 2022, and non-performing assets to total assets were five basis points lower than the second quarter of last year. Our allowance for loan losses is more than five times the level of non-performing loans at the end of the second quarter. As I wrap up prepared remarks, some closing thoughts. We began 2023 expecting incremental pressure on funding costs, which started in the fourth quarter of 2022. The additional market volatility and uncertainty that arose in early March has continued to accelerate those pressures. Positive results from our recurring fee income lines, stable credit quality outcomes, and diligent operating expense management allowed us to continue to report solid fundamental results in the second quarter despite lower levels of net interest income. Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for the remainder of 2023 and beyond. We also remain very excited and optimistic around the performance enhancement opportunities that the combination with Salisbury Bank Corp will create. With that, we're happy to answer any questions you may have at this time. Jonathan?