NBT Bancorp (NBTB) Q1 2021 Earnings Call Transcript – Motley Fool

27April 2021

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NBT Bancorp (NASDAQ:NBTB)
Q1 2021 Earnings Call
Apr 27, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 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. [Operator Instructions]

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 H. WattPresident and Chief Executive Officer

Welcome and thank you for joining us today for NBT’s earnings call covering our first quarter 2021 results. Joining me to review the highlights with you are NBTs 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 US 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 the shift from refi to purchase under way; indirect auto originations exceeded our targets in each of the 3 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 V. MoranExecutive Vice President and Chief Financial Officer

Thanks, John. Turning to Slide 4. 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 continue 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 5 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 under way for the 2020 vintage loans, we have recognized $15.6 million in fees associated with 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 6. 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 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 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 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 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 9. 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 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. 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 and we’re happy to answer any questions that you may have at this time.

Questions and Answers:

Operator

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

Alex TwerdahlPiper Sandler. — Analyst

Hey, good morning all.

John H. WattPresident and Chief Executive Officer

Good morning.

Alex TwerdahlPiper Sandler. — Analyst

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?

John V. MoranExecutive Vice President and Chief Financial Officer

No, Alex, that excludes — I think really what we’re looking for is trying to core ex liquidity, ex PPP pretty stable outcome on NII dollars with some continued pressure on margin.

Alex TwerdahlPiper Sandler. — Analyst

Okay. And then maybe you can 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?

John H. WattPresident and Chief Executive Officer

Sure. I’d 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’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 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’ll be able to capture our share. So we’re feeling optimistic about continued momentum in the commercial book.

Alex TwerdahlPiper Sandler. — Analyst

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 H. WattPresident and Chief Executive Officer

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?

John V. MoranExecutive Vice President and Chief Financial Officer

I think that’s right, John, when 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, would be a pretty good bit of growth. So 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 should get 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 TwerdahlPiper Sandler. — Analyst

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?

John H. WattPresident and Chief Executive Officer

We’re in growth mode, right. So we have retained all of the originations this year.

Alex TwerdahlPiper Sandler. — Analyst

Okay. And then the final question from me is so far in 2021 we’ve 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’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?

John H. WattPresident and Chief Executive Officer

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’ll be able to do the appropriate deal.

Alex TwerdahlPiper Sandler. — Analyst

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

John H. WattPresident and Chief Executive Officer

Thanks, Alex.

Operator

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

Erik ZwickBoenning & Scattergood — Analyst

Good morning, everyone.

John H. WattPresident and Chief Executive Officer

Good morning.

Erik ZwickBoenning & Scattergood — Analyst

All right. 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?

John V. MoranExecutive Vice President and Chief Financial Officer

Yes. So the Slide 14 in 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 $15.6 million in fees so far, most of that would be sort of regular scheduled fee amortization and 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 ’22. So hopefully between that chart and the $14.3 million in unamortized fees remaining that gets you what you need.

Erik ZwickBoenning & Scattergood — Analyst

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. Curious about the data processing and communications line, you had 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?

John V. MoranExecutive Vice President and Chief Financial Officer

I don’t know that we’ve got the value of that at my fingertips, but we can follow up with you on it. 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 item that we would expect to see a little bit about a down drift in 3Q, 4Q once we’re kind of done originating under this vintage. But I think it’s going to be with us for a second quarter and then kind of normalizing in 3Q, 4Q.

Erik ZwickBoenning & Scattergood — Analyst

Great, that’s helpful. And then last one from me, you guys purchased a little under 260,000 shares of common stock in the first quarter. 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 opt on kind of buyback today?

John V. MoranExecutive Vice President and Chief Financial Officer

Yeah, 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 back is lined up for us, we’re absolutely interested in being in the market.

Erik ZwickBoenning & Scattergood — Analyst

Thanks for taking my questions today.

John H. WattPresident and Chief Executive Officer

Thanks, Erik.

Operator

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

Matthew BreeseStephens Inc. — Analyst

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 of that 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 V. MoranExecutive Vice President and Chief Financial Officer

That’s a great question, Matt. That’s kind of the billion dollar question, right? So, I think, 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 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 million. Wholesale funding was down a ton. So we’re 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 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 BreeseStephens Inc. — Analyst

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 H. WattPresident and Chief Executive Officer

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? Yes, it could. But at the moment we are not hearing that.

Matthew BreeseStephens Inc. — Analyst

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 New York-New England markets and 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 H. WattPresident and Chief Executive Officer

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’ll 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 BreeseStephens Inc. — Analyst

Maybe just to follow-up to that, we’ve 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 H. WattPresident and Chief Executive Officer

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 in. 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’ll 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 BreeseStephens Inc. — Analyst

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

John H. WattPresident and Chief Executive Officer

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 H. WattPresident and Chief Executive Officer

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

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

John H. WattPresident and Chief Executive Officer

John V. MoranExecutive Vice President and Chief Financial Officer

Alex TwerdahlPiper Sandler. — Analyst

Erik ZwickBoenning & Scattergood — Analyst

Matthew BreeseStephens Inc. — Analyst

More NBTB analysis

All earnings call transcripts

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