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spk00: Good day, everyone. Welcome to the NBT Bancorp second 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 materially 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. Anyone requiring operator assistance can press the star key and then zero on your touch-tone telephone. 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.
spk01: Good morning, and thank you for joining us today for NBT's earnings call covering our second quarter 2021 results. Here with me today are NBT's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Andesco. I'd like to first welcome Scott as he joins me in hosting the first of what will be many NBT earnings calls. As you all know, he is a proven and successful leader in the small and mid-sized bank space, and based on the reception to our announcement that he is joining our team earlier this month, he needs no further introduction. Many thanks to Annette for serving in the role of Interim Chief Financial Officer. Her consistent leadership and depth of experience will support a seamless transition for Scott. Across the markets we serve, we are seeing building momentum and strengthening local economies. Our team is driving loan growth and although there is volatility in the churn, the commercial pipeline is strong with commercial loans growing at an annualized rate of 4%. Several of our consumer pipelines are also strong, including mortgage and solar, and we expect to benefit from pent up demand over the balance of the year. In our wealth business, AUM and AUA ended the quarter at a record level of $9.8 billion, driving higher fee-based revenue. Our capital continues to build with tangible book value up 4% for the quarter and up 10% from the prior year. Our strong capital base allows for optionality to fund dividends, further organic growth in New England, and to engage in other strategic activities. And on the subject of capital allocation, our Board of Directors voted to approve an increase in the quarterly dividend to $0.28 per share in support of our commitment to enhancing long-term shareholder value. Since our last call, we welcome Dave Brown, President and CEO of the Capital District YMCA, as our newest director. We look forward to having Dave add his perspective to the discussions at our board tables. As we start to put time and distance between the worst of the pandemic and our return to the office, I want to extend thanks to the entire NBT team for their unwavering commitment and many sacrifices throughout the crisis that impacted every aspect of their life. The team has pivoted quickly from supporting our customers and communities through the worst of this period to full-on execution of our strategic growth plans. in the second half of 2021. To talk in greater detail about our second quarter financial performance, I will turn the call over to Scott. Following his remarks, we will take your questions. Scott, it's all yours.
spk04: Thank you, John. I'm feeling great, happy to be rejoining the fray, and very pleased to be part of the team at NBT. Turning to slide four, our second quarter earnings per share were 92 cents. These results were driven by favorable credit results and strong fee income. We had a negative provision of $5.2 million. Charge-offs remained very low at seven basis points. Our reserve coverage decreased slightly to 1.38% excluding PPP loans from 1.48% at the end of the first quarter. Outside of credit, we continue to be pleased with our underlying operating performance Pre-provision net revenue was up 3% as compared to the first quarter of 2021. Slide 5 shows trends in outstanding loans. On a core basis, excluding PPP, loans were up approximately $61 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. Line utilization remains a headwind, but new originations have been fairly brisk. As a reminder, we have additional information on PPP lending on slide 13 in the appendix of today's presentation. Our total PPP balances are currently at $360 million. With forgiveness well underway for the 2020 vintage loans, we have recognized $19.1 million in fees associated with PPP lending, and we have $12.6 million in unamortized fees remaining. We expect the bulk of these to be recognized in the second half of this year. Moving to slide 6, deposits were down $31 million for the quarter, as seasonally expected, with our demand deposits up $87 million. Customer balances remain elevated from liquidity associated with various government support programs. Next on slide 7, you'll see the detailed changes in our net interest income and margin. As we suggested last quarter, net interest income dollars remained consistent as compared to the first quarter. The NIM was down 17 basis points with compression in asset yields partially offset by lower funding costs. Excess liquidity net of PPP activity continued to be a drag on our margin but we again remind ourselves that low-cost core funding should always be viewed as a long-term value driver. Looking forward, as assets continue to reprice in a low-rate environment, we would expect to continue to see some additional core margin pressure. As such, as we deploy liquidity into more productive earning assets over the next several quarters, we would generally expect continued stability in net interest income results. Slide 8 shows trends in non-interest income. Excluding securities gains and losses, our fee income was up link quarter at $39 million. More broadly, non-spread revenue was 33% of our total revenue, which remains a key strength for NBT, and we like each of the non-banking businesses we're in and continue to believe that they are all investable. Retail banking fees were up link quarter due mostly to higher card-related activities. Wealth had another strong quarter on new business wins and market appreciation. Insurance services and retirement plan administration fees were consistent and additive to our mix. Turning to the non-interest expense slide, page 9, our total operating expenses were $71 million for the quarter, and we continued to demonstrate effective cost awareness. We did incur $1.9 million, or 3 cents a share, of non-recurring costs in the quarter, including an estimated legal settlement. We'd expect core operating expense to drift modestly upward over the course of the 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 historical norms at seven basis points. Both NPLs and NPAs declined this quarter. We are continuing to benefit from our conservative underwriting, and thus far, observed credit metrics have been much better than what would have been suggested by the CECL models this time last year. On slide 11, we provide a walk forward of our reserve. Clearly, the economic outlook continues to improve, but uncertainty remains elevated. Including PPP, our allowance to loans ratio was 138 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 will return to more historical norms and, along with expected balance sheet growth, will likely be the drivers of future provisioning needs. As I wrap up prepared remarks, some closing thoughts. We started 2021 on strong footing, and we are pleased with the fundamental results of the first half of the year. 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 expectations. With that, we're happy to answer any questions you may have at this time.
spk00: Thank you. Anyone with a question at this time can press star and then one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for questions. Our first question comes from Alex with Piper Sandler. Your line is open.
spk05: Hey, good morning, guys. Good morning, Alex. And welcome, Scott. Um, first question, uh, actually it's for John. Um, you know, I think if you backed up a couple of quarters as we kind of stared down Durban, um, you know, there would have been, you know, maybe some pressure on you guys to kind of do something a little bit more strategic to, um, to kind of overcome the Durban impact, uh, or the revenue loss. However, kind of as we sit today, um, you know, certainly the entire industry is going to be facing pressure on 2022, just given all the, um, sort of non-repeatable revenue items from 2021. Does that, you know, potential pullback in EPS for 2022 in the industry, does that take pressure off of the need to do something strategic to kind of fill in the Durban impact, or does it add additional pressure?
spk01: So, thanks for that question, Alex. The long-term strategy here remains the same, and the answer to your question is much the same as I gave at the end of Q1, which is obviously we recognize that there is a need to mitigate over a reasonable period of time the loss of Durbin in July 2022, but this company is not going to engage in financial engineering and do a transaction that is not otherwise going to support its strategic growth plans, uh, in new England or in its core regions. Um, with that said, uh, I think you asked in the last queue, what was the level of, uh, dialogue and conversation around, uh, strategic activities. And as we exit the, uh, worst part of the pandemic, uh, like many other companies, that level of conversation has risen, uh, and, uh, We'll see where it takes us. We're very aware that 2022 is going to have all kinds of pressures that you identified. But, you know, we run this company for the long term, and we'll get ourselves through 2022 and into a better environment. And if we do it with a strategic action between now and July, that's great. But only if it fits our long-term growth plans and is easily integratable and culturally aligned and geographically contiguous from a whole bank perspective. From a line of business, fee-based M&A perspective, sure, we're always looking to add to the platform on the retirement services side, on the wealth side. It's frothy in the insurance world right now, private equity driving up valuations, but if we're able to find an appropriately valued potential partner there, we'll consider allocation of capital to one of those deals as well. So, as I said in my comments, you know, we have lots of optionality given this capital base, liquidity, low credit challenges, and with that optionality, we'll find the right thing to do.
spk05: Great. And then switching over to the reserve, if I remember correctly, your CECL day one reserve was around, I think, 106. Correct me if I'm wrong. You're sitting today at kind of 131. Charge-offs actually have been a lot better over the last couple quarters than even your historic charge-off run rate. Just kind of curious, you know, how quickly, if you see that sort of 106 as the endpoint for the reserve, how quickly you get there or if actually, you know, based on what you're seeing today, the reserve actually should head lower than that.
spk04: Great question, Alex. And I think generally the consensus is that it starts to go back toward that day one base over time. But I don't think we're looking at that as being a sprint, that that'll be a measured return back to that, just given some of the uncertainties that still exist. you know, are out there from a market standpoint. You know, and again, you know, from an underlying, you know, from an underlying standpoint, better improved results from a net charge off standpoint, as well as improvements in each of these economic factors, you know, kind of lead you down to that over time. But I wouldn't expect you to get back to those, you know, in just the next couple of quarters.
spk05: Okay. And then last question for me, the legal settlement reserve that you guys set aside, is that related to your indirect auto business? No. Okay. That's it for me. Thanks for taking my questions.
spk01: Thank you, Alex. Good to talk to you, Alex. Thank you.
spk00: Our next question comes from Matthew Breeze with Stevens Inc. Your line is open.
spk03: Good morning. Hey, good morning. How are you, man? I'm doing great. Glad to hear from you both. A couple questions for me. So first, you know, really nice to see continued core loan growth and certainly feels like there is increased optimism on that front. Can you just give us a sense for where the commercial and consumer loan pipelines kind of stand today? And maybe some, perhaps some anecdote, either, you know, what's working? Is it a certain geography or business line or where are things most active today?
spk01: Happy to do that. First of all, let me talk about the commercial pipeline. In the process of negotiation and approval categories five and six, if you're a Salesforce user, we have about $250 million, which is about 50% higher than where we were last year. When you put on top of that proposals under development and loans that we have bid on, there's another $330 million. That's up 130% from the prior year as well. We see it across the platform. The originations in the last quarter, it was just shy of 30% in New England, and the balance was here in our core regions. We see it in not only CRE but in CNI. We see a really relatively robust pipeline in our Hartford and Central Connecticut market, and that's a function of the great bankers that we're able to recruit to our team, and it's a function of all of the disruption that's going on, as we've discussed in the past. We expect more traction out of that pipeline, effort that we have underway to identify opportunities that are the result of that disruption. So we feel pretty good about that. You know, we see churn in the portfolio. Clearly, in this rate environment, people are still considering refinancing down. And for a good customer, we'll do the right thing and retain. But Sometimes we see competitors doing long-term on-balance sheet offers that we're not going to match. Unfortunate, but we see that. And we go up against government agencies who offer products and services that would make your head spin in terms of their terms and conditions and tenor and pricing, and we let those go as well. But With that said, the team is really focused in each one of our regions. We're actively out there going head-to-head, and clearly pricing is the challenge with all of our competitors sitting on excess liquidity like we are. But the quality of what we have to offer, the speed to market, the ability to turn around and get to the closing table quickly helps differentiate us against some of the smaller competitors. Obviously, our balance sheet allows us to do more and be more flexible. And in those markets we serve, that has also allowed us to be successful. So I hope that's responsive, kind of a high flyover commercial in particular. No, mortgage pipeline still strong. In our indirect, I'm sorry, in our specialty lending business, the demand for residential solar still very strong and growing. So we feel good about that as well.
spk03: Great. And then, you know, you mentioned competitive conditions. Could you give us some insight into, you know, what new loan yields are coming on the books today versus what's existing and then just as a follow-up, maybe give us some color on the core margin outlook. Obviously, there's a lot of liquidity. And the core NII outlook, because it feels like, at least in the immediate term, those two items could be on diverging paths.
spk04: Let me take a shot at that, Matt, to see if I can give you enough to kind of work with. In the quarter, new commercial originations were very, very close to where the portfolio actually sits from a yield standpoint today. you know, within 10 or 12 basis points, generally speaking. I'm not sure that necessarily is a trend because, as you know, sometimes commercial activity tends to be episodic. So do we feel good about the fact that during the quarter we actually originated the bulk of our originations slightly above the blended yield of the combined CRE and CNI portfolio? Do you feel okay about that? I don't think that that's necessarily a sign that times are out there where spread widening is underway, but we'll probably actually take stability in that line at the current time and think that's pretty good. Indirect auto for the quarter, the originations were in the 335 range. The blended portfolio is a little bit over 4, so yes, some compression still happening there. And we're not going to chase longer terms. That seems to be what's happening with robust used car valuations. I think we're finding a lot of our dealers are sitting across from customers and terms are into the 70- and 80-month levels. That's not our sweet spot. And quite frankly, if that's the case, quote, net of dealer compensation, we're probably not winning on some of those. I think you can turn the volume on in that line of business if you want to back up a little bit relative to net yields, which is fine. And that's a good asset class, you know, from a duration standpoint. You know, but we're, you know, big judicious on that. So you could see growth in that portfolio next quarter or you might see a retraction again. And I think either one could happen. On the REFI mortgage side, rates are clearly lower than the blended yield in the portfolio today, probably more like a 290 being portfolioed as opposed to a 350, 360 blend in the portfolio. I still think it's the right thing to do given lost characteristics and just general track record relative to success on that core product ratio. But from a general standpoint, still compression expected net of that. On the specialty lending side, yields are pretty consistent on a blended mix standpoint. And we are very mix-dependent relative to that specialty lending side. But, you know, are rates a little bit lower than where the blend is? Yeah, they are, you know, in terms of the portfolio mix. So I would say on a core basis, if you sort of push the PPP noise out of the way, and heaven forbid you have to push the liquidity noise out of the way a little bit, probably a good time for just a quick reminder. The net liquidity doesn't cost us anything from net interest income generation. It just makes the margin look a little ugly. So it's not a net negative. But it's an opportunity cost. We're not likely to jump into an extended duration outcome to get $900 million deployed. It's just not practical, and it's just not comfortable for us relative to the right asset classes. Are we completely on the sidelines? Probably not completely, but I think we're just trying to be very practical. I mean, Treasury folks are really earning their money right now. If you can find good one-year, two-year type blended duration assets and change the Fed funds rate from 10 or 15 basis points into something – you know, between 50 and 100, we're probably doing some of that stuff. And it's practical and it's with core customers. So I would guess, you know, sort of a three to five basis point type compression risk associated with the third and the fourth quarter as we currently sit. And, you know, I think we're generally pretty bullish that, you know, the volume generation possibilities are enough to keep net interest income kind of consistent with where we were in the second quarter.
spk03: Perfect. I appreciate that. The other one I had was, you know, we are talking a little bit more about Fed hikes at some point here. Could you just remind us, you know, what percentage of the book is floating rate and unencumbered by floors?
spk04: Yes, let's kind of talk about that in no particular order. The CNI book is about 50% floating or adjustable. In CRE, about 54% is floating, 24% is adjustable. and what we would call business banking, so small business lending, lower amount of floating, 13%, 45% adjustable. I would kind of look at indirect auto given how fast that turns and say you get to reprice your cash flows there over about a 36- to 40-month period, maybe even a little sooner given – you know, sort of the demand today, with the one caveat that dealers are still having a hard time finding used cars. There's no doubt about that. And, you know, would I say that people are financing at aggressive terms? I don't know if I would so much as say that, but loan-to-values on used cars today are clearly above 100%, you know, in terms of where loans are being closed today. So I think in the total portfolio, I kind of look at it this way, that maybe around 40% of the portfolio floats or adjusts with expected cash flows still pretty low. you know for the institution so in the event you actually get a rate hike which as you know we're in that long line of cheerleaders for that probably over longer term you know that you know I think we would have some opportunity from a repricing none of our forecasts right now indicate that we're going to get some kind of repricing optionality before 2023 but you know essentially you know if I've been prognosticating in the past I've probably been wrong more than I've been right so take that for what it's worth
spk03: Perfect. Last one for me is just, can I get an update on where you expect the tax rate to come in?
spk04: Yeah, I think that sort of the, you know, mid-22s, you know, with a handful of mixed changes, could you be as low as 22? Could it be as high as 23, given sort of the state complement of where we do business? I think you're safe in that range. Perfect. That's all I had. Thank you for taking my questions. And, Scott, great to hear from you again. Great, Matt. I appreciate it. Thanks so much.
spk00: Again, if you have a question, please press star and then the one key on your touchtone telephone. Our next question comes from Eric Zwick with Boning and Sattergood. Your line is open.
spk02: Hi. Good morning, everyone. Good morning, Eric and Eric. Just one question remaining for me today. Within the press release, you talk about the continued expansion in the New England region and the new branch in Connecticut. John, I think in one of your responses to the loan growth question mentioned some opportunities to maybe capitalize on some disruption in Connecticut as well. Just curious, as you look at the rest of your New England states and markets, where you see opportunity potentially to add branches or new lenders or, you know, from that perspective?
spk01: Great question, Eric. And recognizing the competitive dynamics, I'll stay high level but acknowledge that, again, We have opportunity in Vermont. We have opportunity in mid and southern New Hampshire. We have opportunity in Western Mass and clearly in central Connecticut. And that involves not only the recruitment of high-performing bankers, but also the conversion of customers who In evaluating what's important to them, determined that affiliating with a several hundred billion dollar bank perhaps is not in alignment with how they want to run their business. Clearly, we've identified in each of those markets opportunities where that might be the case. and we have the balance sheet, we have the technology and treasury management platform to serve 99% of all of those potential prospects, and we're driving hard to position ourselves when the time is right over the next, and this is a long-term focus here, over the next several years to take advantage of that disruption and Uh, we have been successful doing it in the past. Uh, and, uh, in this case, uh, we feel really good about where we are now. So, uh, all of those states, uh, uh, we have a focus, uh, and I guess in Southern coastal Maine as well, add that to the list. There's clearly opportunity there on the fee-based side and, uh, on the loan side. Uh, and, uh, we've got that, uh, identified, prioritized, and, uh, We're executing there as well.
spk02: Thanks. I appreciate the detail there. That's it for me today. Thanks for taking my question. Hey, good to talk to you. Take care.
spk00: I'm not showing any further questions. I will now turn the call back to John Watt for his closing remarks.
spk01: Well, I thank you. And, again, thank you all for participating in today's call, for welcoming Scott to our team. and we look forward to catching up to you either one-on-one or in the next quarter. Be well and be safe. Thank you.
spk00: Thank you, Mr. Watt. This concludes our program. You may disconnect. Have a great day.
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