NBT Bancorp Inc

NASDAQ:NBTB

Earnings Call Transcript 2021-Q1

[Operator]

Good day, everyone. Welcome to the NBT Bancorp First 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 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. [Operator Instructions]

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. [Operator Instructions]

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.

[John Watt, President and CEO]

Welcome and thank you for joining us today for NBT’s earnings call covering our first quarter 2021 results. Joining me to review highlights with you are NBT’s Chief Financial Officer, John Moran; and our Chief Accounting Officer, Annette Burns. Following our remarks, we will take your questions.

At NBT we are optimistic about the momentum in the U.S. economy and the growing economic activity in the markets where we conduct business. Looking back at the first quarter, we earned $0.91 per share and pre-provision net revenue was up 6% year-over-year.

As we look to participate in the upcoming snap back of the economy, NBT is well-positioned to serve our customers with great products and services. For example, adoption of digital banking services is up across our customer base, including year-over-year increases of 31% in consumer digital adoption, 60% in online account opening and 95% in mobile dollars deposit. Commercial loans grew in Q1 and our pipelines continue to build.

Business banking and commercial activity associated with our expansion in Connecticut is strong. Our mortgage business remains very active, with a shift from refi to purchase underway. Indirect auto originations exceeded our targets in each of the three months of the first quarter. Assets under management and under administration in our Wealth Management business ended the quarter at a record level of $9.3 billion.

At NBT, leveraging market disruption is a core competency and we have comprehensive plans in place to address current opportunities in our markets. This disruption should over the long-term drive organic growth.

Finally, yesterday, our Board of Directors approved a $0.21 dividend payable in June.

To talk in greater detail about our financial performance, I will turn the call over to our Chief Financial Officer, John Moran.

[John Moran, Chief Financial Officer]

Thanks, John. Turning to slide four, as John highlighted, our first quarter earnings per share were $0.91. These results were driven by favorable credit and well-controlled operating expenses. As you can see, we had a negative provision of $2.8 million, charge-offs remained a very low 13 basis points excluding PPP loans and our reserve coverage decreased slightly to 1.48% excluding PPP from 1.56% in the fourth quarter.

Outside of credit, we continued to be very pleased with our underlying operating performance. Pre-provision net revenue was fairly consistent with the fourth quarter levels and up 6% as compared to the year ago period. Tangible book value per share was up 1% on the quarter and has grown nearly 10% year-over-year.

Slide five shows trends in outstanding loans. On a core basis, excluding PPP, loans were up approximately $30 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. Commercial loans were up nearly 7% on a linked-quarter annualized basis. Line utilization remains a headwind, but new originations have been fairly brisk. We have added additional information on PPP lending to slide 14 in the appendix of today’s presentation.

Our total PPP balances are now just under $570 million, with forgiveness now well underway for the 2020 vintage loans, we have recognized $15.6 million in fees associated with the PPP lending to-date. We have an additional $14.3 million in unamortized fees remaining. We expect the bulk of these to be recognized in the back half of this year.

Moving to slide six, deposits were up about $735 million point-to-point for the quarter and our core deposits were up an even stronger $760 million. Obviously, customer cash remains elevated on increased liquidity associated with various government support programs. As we highlighted last quarter, these deposits have remained stickier than we would have expected.

Next on slide seven, you will see the detailed changes in our net interest income and margin. As we suggested last quarter, NII dollars remained relatively constant as compared to fourth quarter. The NIM was down 3 basis points, with compression and asset yields partially offset by lower funding costs. Excess liquidity and PPP created a net 8 basis point drag on margin and that was unchanged from the prior quarter.

Looking forward, as assets continue to re-price in a lower rate environment, we would expect to continue to see some additional core margin compression over the course of 2021, excluding any impact of PPP or excess liquidity. As we deploy liquidity into more productive earning assets over the next several quarters, we would expect continued stability in NII dollars.

Slide eight shows trends in non-interest income. Excluding securities gains and losses, our fee income was down slightly linked-quarter at $37 million. More broadly, non-spread revenue was 32% of our total revenue and this remains a key strength for NBT as compared to peers.

Retail banking fees were down linked-quarter, mostly due to lower levels of overdrafts and service charges. RPA and wealth both had strong quarters on new business wins and market appreciation. Insurance was stable. Other revenue was down on a tough linked-quarter comp due to exceptionally strong swap income in the fourth quarter.

Turning to non-interest expense on slide nine. Our total operating expenses were $68 million for the quarter and we continue to demonstrate cost discipline. Other expenses ran lower than we expected in several areas, including professional services, advertising, loan collection, travel training and other other. These differences were driven by timing and normal seasonality.

Also, we experienced a $1.4 million linked-quarter decrease in the provision for unfunded commitments. We would expect operating expense to gradually drift upward over the course of this 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 normal at 13 basis points. Both NPLs and NPAs decreased this quarter.

Amy Wiles, our Chief Credit and Risk Officer, is available in Q&A for detailed questions. But, generally, we are continuing to benefit from our conservative underwriting, and thus far, observed credit metrics have been much better than what would have been predicted by the CECL models this time last year.

Our deferrals are down more than 40% in dollar terms from our last report and now stand at less than 1% of loans. That’s down from a peak of approximately 15% during the second quarter of last year. Likewise, past due loans were down 40% from last quarter.

And as usual on slide 11, we provide a walk forward of our reserve. Clearly, the economic outlook continues to improve, but uncertainty remains elevated. Excluding PPP, our allowance to loan ratio was 148 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 and balance sheet growth will drive future provisioning needs with the model-driven reserving that we experienced in the first two quarters of 2020 now a potential tailwind for 2021.

As I wrap up my prepared remarks, some closing thoughts. We started 2021 on strong footing and we are very pleased with the fundamental results of the quarter. 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 our expectations.

With that, we do have the full team here. We are happy to answer any questions that you may have at this time.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

[Alex Twerdahl, Piper Sandler]

Hey. Good morning, all.

[John Watt, President and CEO]

Good morning.

[Alex Twerdahl, Piper Sandler]

First off, just wanted to -- John, I think, in your -- John Moran, in your prepared remarks you alluded to the NII showing some stability going forward. Is that inclusive of all the volatility of the PPP program or is that excluding the PPP?

[John Moran, Chief Financial Officer]

No. Alex, that excludes -- I think really what we are looking for is kind of core ex-liquidity, ex-PPP, pretty stable outcome on NII dollars with some continued pressure on margin.

[Alex Twerdahl, Piper Sandler]

Okay. And then maybe you can give a little bit more commentary on the loan pipelines, how they are sitting at the end of the quarter and how you are feeling about the prospects of a potential second half recovery in lending activity.

[John Watt, President and CEO]

Sure. I will be happy to take that one, Alex. Good morning. We feel really good on the consumer side to start off here. The pipelines in mortgage are substantial as we move into the prime selling season and we have seen a shift from Refi 2 purchase, so feeling good there.

We saw in our indirect auto business substantially larger originations than we had projected in January, February and March, and we expect that’s going to continue. There was shrinkage overall in that portfolio, but that’s going to reverse itself in the next couple of months, we believe, given the volumes that we are reviewing daily. So we feel good about that.

On the commercial side, originations and production were up in the quarter. We have a pipeline well in excess of $450 million and we would anticipate as the markets continue to demonstrate that they are opening and will be more vibrant, that we will be able to capture our share. So we are feeling optimistic about continued momentum in the commercial book.

[Alex Twerdahl, Piper Sandler]

That’s great. Will the commercial pipeline, do you think that’s strong enough to be able to offset the PPP forgiveness over the rest of the year?

[John Watt, President and CEO]

I don’t think we have done that forecast yet. I think it depends on the momentum and the acceleration of the economy. But I am not sure that we quantified that yet. John, I don’t know whether you want to add to that.

[John Moran, Chief Financial Officer]

I think that’s right, John. What we are thinking about current PPP balances and what would be implied in terms of organic growth to kind of catch that up depending on how quickly things clean up. That be a pretty good bit of growth.

So, directionally certainly we are hopeful, we are optimistic, pipelines continue to rebuild, commercial activity is looking pretty good and the footprint continues to reopen. Things are getting back to certainly maybe not pre-COVID normal, but some semblance of normality. But to offset all of the PPP, I think, might be a tall task.

[Alex Twerdahl, Piper Sandler]

Okay. I guess I didn’t realize how large that number was. And then in terms of the residential production that you are seeing, can you just remind us the strategy for putting that on the balance sheet versus selling it?

[John Watt, President and CEO]

We are growth mode, right? So we have retained all of the originations this year.

[Alex Twerdahl, Piper Sandler]

Okay. And then final question for me is, so far in 2021 we have seen M&A as a pretty major theme across bank land. I think last time we spoke you kind of felt like maybe due diligence was still a little bit challenged just given the uncertainties around the reopening of the pandemic. Do you feel like you are at a point now where you can get comfortable enough with other balance sheets to actually have real conversations and are there any companies out there willing to have those conversations?

[John Watt, President and CEO]

So, just preliminary thought there, as I have expressed over the years. This is primarily an organic growth strategy with the ability to consider fill-in and bolt-in over time for the right strategic opportunity. We are open to that.

Do I believe that we can accomplish all of the due diligence and related work necessary to make an offer and close a deal, I do and I think that’s being demonstrated in the markets right now pretty clearly.

Are there opportunities to have conversations? Of course, there are and they go on pretty regularly. And if the right opportunity presents itself, I think, given the premium valuation that we carry and overall the value of our currency we will be able to do the appropriate deal.

[Alex Twerdahl, Piper Sandler]

Great. Thank you for the commentary. That’s all my questions for now. Thank you.

[John Watt, President and CEO]

Thanks, Alex.

[Operator]

Thank you. And our next question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.

[Erik Zwick, Boenning & Scattergood]

Good morning, everyone.

[John Watt, President and CEO]

Good morning.

[Erik Zwick, Boenning & Scattergood]

If I could start first, I guess, probably a question for you, John Moran. With regard to PPP, give the balance of the remaining unamortized fees and just curious if you can also break that out in terms of those loans that were originated in 2020 versus those here in 2021.

[John Moran, Chief Financial Officer]

Yeah. So the slide 14 of the appendix is a new one for us that gives a lot of detail on PPP and kind of where things stand by vintage. In total, we have recognized $15.6 million in fees so far. Most of that would be sort of regular scheduled fee amortization and forgiveness cleanup of the 2020 vintage. We have $14.3 million in unamortized fees that remain and the bulk of that is up of the newer vintage.

I would expect the bulk of those to be recognized in the back half of this year, call it, 3Q, 4Q kind of event and then there will be a little piece of it that sort of stays with us we suspect into 2022. So, hopefully, between that chart and the $14.3 million on unamortized fees remaining that that gets you what you need.

[Erik Zwick, Boenning & Scattergood]

Yeah. That’s perfect. Thank you. I had missed those numbers there. Great. And then turning to non-interest expenses. Thanks for the update on kind of expectations for those for the run rate to gradually drift upwards this year. I am curious about that data processing and communications line. You mentioned that the addition of the digitized PPP platform kind of had those higher in 1Q. Was that a onetime expense or will that be ongoing and just kind of curious what that value might have been in 1Q?

[John Moran, Chief Financial Officer]

I don’t know that we have got the value of that at my fingertips, but we could follow up with you on it. The -- it did run elevated on that. That is a variable cost associated with putting the loans on. So as the program wraps up, that costs should drift downward. That would be probably the one place on the OpEx line items that we would expect to see a little bit about a down drift in 3Q, 4Q, once we are kind of done originating under this vintage. But I think it’s going to be with us for second quarter and then kind of normalizing in 3Q, 4Q.

[Erik Zwick, Boenning & Scattergood]

Great. That’s helpful. And then last one for me, you guys purchased a little under 260,000 shares of common stock in the first quarter. Just curious how you are thinking about buyback today, it sounds like you are optimistic that that loan growth comes back, that would be the kind of preferred use of capital. But would you continue to use buyback as part of your kind of total capital return to the shareholder strategy in combination with the dividend or just thoughts on kind of buyback today?

[John Moran, Chief Financial Officer]

Yeah. I think -- look, I think, buyback is clearly an arrow in the quiver and something that we have historically been pretty opportunistic around. And I wouldn’t encourage you to dial-in a big buyback into your numbers for this year, but if we have got the opportunity to do it and it makes sense, when the earn backs line up for us, we -- we are absolutely interested in being in the market.

[Erik Zwick, Boenning & Scattergood]

Thanks for taking my questions today.

[John Watt, President and CEO]

Thanks, Erik.

[Operator]

Thank you. [Operating Instructions] Our next question will come from Matthew Breese with Stephens. Please go ahead.

[Matthew Breese, Stephens]

Hey, John. Just curious so, obviously, the deposits have been a little bit stickier than you thought. The cash position of the balance sheet a little bit higher than I think we would have thought six months ago. As we look at that $972 million total with cash, probably, closer to $1 billion. How much do you assign a more volatile value attributable to probably deposits that flow out of the bank and PPP? And how much you think is investable and how should we be thinking about securities over the course of the year?

[John Moran, Chief Financial Officer]

That’s a great question, Matt. That’s kind of the billion dollar question, right? So, I think, the -- we are studying this really carefully. And I think as you would expect from us, right, culturally, we are pretty cautious. We are pretty conservative.

Certainly, last year our expectation would have been a little bit less sticky than it’s proven to be. We are working to think through the liquidity and how to deploy. It’s been an uphill battle. The deposit growth has really continued to be fairly robust on government stimulus and some other things, right?

If you look back at last year, we did grow the investment book $360 million. Wholesale funding was down a ton. So we really focused on kind of pulling levers on the liability side of the balance sheet last year and then grew the investment book a little bit.

I think when you look forward this year, certainly a chunk of this is with the bank for longer than what we would have thought. And we are absolutely evaluating opportunities to kind of continue to grow the investment book and look, ideally, things snap back and we get more robust loan growth and that’s kind of what the plan is.

[Matthew Breese, Stephens]

Okay. Okay. The second thing I want to talk about was, I understand that your auto and dealer finance book is picking up. I have been hearing that there’s a shortage of semiconductor and chips that’s affecting the auto market. I am just curious if you are seeing or hearing any of that and how that might play through for the rest of the year on your auto book?

[John Watt, President and CEO]

So I have been asking that question myself, Matt, and reminded when I do that, the mix here is late model used about 60%, new 40% and that changes quarter-to-quarter. But approximately that’s where we are.

So, clearly, a late model used is in a place where valuations are increasing and there is product to sell. We have not heard back from our dealers yet that they are facing challenges that are putting pressure on their ability to sell. Could that present itself to us later in the year? But -- yes, it could. But at the moment we are not hearing that.

[Matthew Breese, Stephens]

Okay. Last one for me -- kind of the opposite of the M&A question. Your markets have been incredibly disrupted by recent acquisitions large scale, especially some of your newer dwindling markets in Connecticut. Just curious how you are sizing up the hiring and client acquisition opportunity, maybe talk a little bit about that? And then secondarily, do these acquisitions open up any new markets that you could enter into similar to Vermont, Portland, Maine, and Portsmouth, New Hampshire and the newest, Connecticut markets?

[John Watt, President and CEO]

So appreciate that question and I think I said upfront that, it is one of our core competencies to leverage disruption in the markets we serve. As we all have been reading over the last 60 days, there is plenty of disruption in New England associated with several large deals that have been announced.

We are well-positioned in markets in Connecticut, in Maine, New Hampshire and Vermont to deploy our disruption strategy. I want to say that, we have the highest regard for the biggest acquirer in that market and we have been competing against that acquirer for 30 years or more.

With that said, there are customers and there are really talented bankers who don’t want to affiliate with an organization that large and we have the opportunity to have conversations there every day. I don’t want to go too deeply into our strategy, but I will share with you that we have put a lot of time and effort, and deployed resources into executing on what will be a marathon strategy.

Remember, we are still capitalizing on the First Niagara/Key transaction and still converting customers and hiring bankers as a function of it. So, this will be a multiyear strategy and you can expect from time to time that we will have the opportunity to talk about what’s going on in specific markets and we are evaluating expansion opportunities as well and they do exist.

[Matthew Breese, Stephens]

Maybe just to follow-up to that, we have seen NBT historically stay away from the denser metropolitan areas. Boston seems to be an area that’s right now going through some consolidation and heavy acquisition. Is that a market that we could potentially see you get closer to or enter into?

[John Watt, President and CEO]

So, we have stated many times, as you know, that inside $495 million is probably not the geography that we are going to be most successful on. Clearly, there is a competitive battle going on there. And two of the largest and highest performing banks there have announced deals in the last couple of months, and there will be disruption associated with them.

But I don’t see NBT planting the flag inside $495 million in any meaningful way. We will let that competitive battle play out among those players and there’s plenty for us to do across Northern New England and in our expansion opportunity in Central Connecticut right now.

[Matthew Breese, Stephens]

Great. I suspected as much. Thank you so much for taking my questions.

[John Watt, President and CEO]

Absolutely. Good to talk to you.

[Operator]

I am showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. John Watt for his closing remarks.

[John Watt, President and CEO]

Thank you, Operator. In closing, I’d like to take the opportunity today to acknowledge that this has been John Moran’s last earnings call with NBT. On behalf of the entire team here at NBT, I want to thank him for all his many contributions, and wish John and his family the very best in the future.

To everyone who joined us today, we appreciate your participation, as well as your continued interest in NBT and we look forward to talking to you, and perhaps, seeing some of you in the near future. Thanks.

[Operator]

Thank you to everyone who participated on today’s conference call and for your interest in NBT Bancorp. This concludes today’s program. You may now disconnect and have a great day.