Earnings Call: Q1 2021

Apr 27, 2021

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 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. 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. Welcome and thank you for joining us today for NBT's earnings call covering our Q1 2021 results. Joining me to review the 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 Q1, 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 snapback 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 3 months of the Q1. Assets under management and under administration in our wealth management business ended the quarter at a record level of $9,300,000,000 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. Thanks, John. Turning to slide 4. As John highlighted, our Q1 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 $2,800,000 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 4th quarter. Outside of credit, we continued to be very pleased with our underlying operating performance. Pre provision net revenue was fairly consistent with the 4th 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 5 shows trends in outstanding loans. On a core basis, excluding PPP, loans were up approximately $30,000,000 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 $570,000,000 With forgiveness now well underway for the 2020 vintage loans, we have recognized $15,600,000 in fees associated with PPP lending to date. We have an additional $14,300,000 in unamortized fees remaining. We expect the bulk of these to be recognized in the back half of this year. Moving to Slide 6, deposits were up about $735,000,000 point to point for the quarter and our core deposits were up an even stronger $760,000,000 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 7, you'll see the detailed changes in our net interest income and margin. As we suggested last quarter, NII dollars remained relatively constant as compared to 4th quarter. The NIM was down 3 basis points with compression in 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 reprice 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 8 shows trends in non interest income. Excluding securities gains and losses, our fee income was down slightly linked quarter at $37,000,000 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 4th quarter. Turning to non interest expense on slide 9. Our total operating expenses were $68,000,000 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 $1,400,000 linked quarter decrease in the provision for unfunded commitments. We'd 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 and 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 Q2 of last year. Likewise, past due loans were down 40% from last quarter. 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 1st 2 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 and we're happy to answer any questions that you may have at this time. Thank you. Our first question comes from Alex Twerdahl with Piper Sandler. Please go ahead. Hey, good morning all. Good morning. 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 does that exclude the PPP? No. That excludes I think really what we're looking for is kind of core ex liquidity ex PPP, pretty stable outcome on NII dollars with some continued pressure on margin. Okay. And then maybe you could give a little bit more commentary on the loan pipelines, how they're sitting at the end of the quarter, and how you're feeling about the prospects of a potential second half recovery in lending activity? Sure. I'll be happy to take that one, Alex. 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've seen a shift from refi to purchase. So feeling good there. We saw in our indirect auto business substantially larger originations than we had projected in January, February 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 $450,000,000 And we would anticipate as the markets continue to demonstrate that they are opening and will be more vibrant that we'll be able to capture our share. So we're feeling optimistic about continued momentum in the commercial book. That's great. Will the commercial pipeline, do you think that's strong enough to be able to offset the PPP forgiveness over rest of the year? I don't think we've done that forecast yet. I think it depends on the momentum and the acceleration of the economy, but not sure that we've quantified that yet. John, I don't know whether you want to add to that. I think that's right, John. Look, if you think 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'd be a pretty good bit of growth. Directionally, certainly, we're hopeful. We're 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. Okay. I guess I didn't realize how large that number was. And then in terms of the residential production that you're seeing, can you just remind us the strategy for putting that on the balance sheet versus selling it? We're in growth mode, right? So we have retained all of the originations this year. Okay. And then final question for me is, so far in 2021, we've seen M and 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 uncertainties around the reopening and the pandemic. Do you feel like you're at a point now where you can get comfortable enough with other balance sheets to actually have real conversations? And are there companies out there willing to have those conversations? 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're 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. Great. Thank you for the commentary. That's all my questions for now. Thank you. Thanks, Alex. Thank you. And our next question will come from Eric Zviuk with Boenning and Scattergood. Please go ahead. Good morning, everyone. Good morning. If I could start first, I guess probably a question for you, John Moran. With regard to PPP, do you have 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? Yes. 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've recognized $15,600,000 in fees so far. Most of that would be sort of regular scheduled fee amortization and forgive this cleanup of the 2020 vintage, we have $14,300,000 in unamortized fees that remain, and the bulk of that is off 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'll be a little piece of it that sort of stays with us, we suspect, into 2022. So hopefully, between that chart and the $14,300,000 in unamortized fees remaining, that gets you what you need. Yes, 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 the expectations for those for the run rate to gradually drift upwards this year. Curious about the 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 one time expense? Or will that be ongoing? And just kind of curious what that value might have been in 1Q? I don't know that we've 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 cost should drift downward. That would be probably the one place on the OpEx line items that we would expect to see a little bit of a downdrift in 3Q, 4Q once we're kind of done originating under this vintage. But I think it's going to be with us for Q2 and then kind of normalizing in 3Q, 4Q. Great. That's helpful. And then last one for me. You guys purchased a little under 260,000 shares of common stock in the Q1. Just curious how you're thinking about buyback today. It sounds like you're 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 shareholder strategy in combination with the dividend or just thoughts on kind of buyback today? Yes. I think look, I think buyback is clearly an arrow in the quiver and something that we've 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've got the opportunity to do it and it makes sense when the earn backs line up for us, we're absolutely interested in being in the market. Thanks for taking my questions today. Thanks, Eric. Thank you. Our next question will come from Matthew Breese with Stephens. Please go ahead. Hey, John, just curious. So obviously, the deposits have been a little bit stickier than you thought. The cash position of the balance sheet is a little bit higher than I think we would have thought 6 months ago. As we look at that $972,000,000 total with cash probably closer to $1,000,000,000 how much of that do you sign a more volatile value attributable to probably deposits that flow out of the bank and PPP? And how much do you think is investable? And how should we be thinking about securities over the course of the year? That's a great question, Matt. That's kind of the $1,000,000,000 question, right? So I think the yes, we're studying this really carefully. And I think as you'd expect from us, right, culturally, we're pretty cautious. We're pretty conservative. Certainly, last year, our expectation would have been that this 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 because 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 $360,000,000 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 and with the bank for longer than what we would have thought. And we're 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. Okay. The second thing I want to talk about was I understand that your auto and dealer finance book is picking up. I've been hearing that there's a shortage of semiconductor and chips that's affecting the auto market. I'm just curious if you're seeing or hearing any of that and how that might play through for the rest of the year on your auto book? So I've been asking that question myself, Matt, and I'm 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, 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? Yes, it could. But at the moment, we're not hearing that. Okay. Last one for me, kind of the opposite of the M and A question. Your markets have been and we have been competing in any meaningful way, 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. Great. I suspected as much my question is. Absolutely. Good to thought. I'm showing no further question at this time. I would now like to turn the call back over to Mr. John Watts for his closing remarks. 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 We appreciate your as well as your continued interest in NBT and look forward to talking to you and perhaps seeing some of you in the near future. Thanks. Thank you to everyone who participated on today's conference call and for your interest in MBT Bancorp. This concludes today's program. You may now disconnect and have a great day.