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spk00: Good day, everyone. Welcome to the NBT Bancorp Third 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 note 1, 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. Anyone requiring operator assistance can press the star key, then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to NBT Bancorp's president and CEO, John H. Watt, Jr., for his opening remarks. Mr. Watt, please begin.
spk01: Good morning, and thank you for participating in our earnings call covering NBT Bank Corp's year-to-date and third quarter 2021 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Andesco. At NBT, we continue to experience momentum across the markets we serve and a business climate that is generally vibrant, although not without pockets of volatility. despite the ongoing impact of COVID. The headline for today is that we are pleased to report earnings per share of 86 cents for the third quarter, which is a consistent and productive result. Our team increased commercial and consumer loans with growth of 2% on a linked quarter basis, excluding PPP, and we managed our total cost of deposits down to 10 basis points. At the end of the third quarter, the commercial pipeline in the customer acceptance and moving to closing stages was over $300 million. This pipeline covers our seven-state banking platform. Credit quality remains strong as non-performing and criticized assets both declined in the quarter. Our balance sheet is also strong, and our ability to generate capital is robust, with tangible book value per share growing nearly 10% since the third quarter of 2020. The strength of our balance sheet continues to provide optionality to consider the opportunistic and strategic deployment of our capital. With non-interest income to total revenue at 34%, our diversified fee-based businesses had a great quarter. AUM and AUA was $9.7 billion at the end of the queue. Across our New England footprint, we are advancing our organic growth strategy by leveraging the market disruption occurring in that region. We have hired both customer-facing bankers and team members focused on operations and support. We have also started to convert customers and believe we are at the front end of a multi-year growth strategy. In August, we welcome Ruth Mahoney to NBT and our executive management team as the president of Wealth Management. Ruth has more than 30 years of experience in wealth management, private banking, retail banking, and regional leadership. She joins us after many years as a senior banker at Key Corp in New York's Capital Region. We're fortunate to have Ruth on our management team. To walk you through the detail on our third quarter financial performance, I will now turn the call over to Scott, and following his remarks, we'll take your questions. Scott, over to you. Thank you, John.
spk03: Turning to slide four, our third quarter earnings per share were 86 cents. These results were driven by favorable credit metrics and strong fee income. We recorded a negative provision of $3.3 million in the quarter. Charge-offs remained very low at 11 basis points. Our reserve coverage decreased to 1.28%, excluding PPP loans, from 1.38% at the end of the second quarter of 2021. Overall, we continue to be pleased with our underlying operating performance. Slide 5 shows trends in outstanding loans. On a core basis, excluding PPP, loans were up approximately $132 million for the quarter, or 1.8%. As John suggested earlier, commercial activity has steadily improved, and we continue to have good momentum in several of our businesses. Commercial line utilization remains a headwind, but new originations have been good. The lack of vehicle inventories has continued to challenge net results in our indirect auto portfolio, and we experienced a decline in outstandings for the fifth consecutive quarter. Also, 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 now around $276 million. With forgiveness well underway for both the 2020 and 2021 vintage loans, we have recognized $21.1 million in total fees associated with PPP lending, and we have $10.7 million in unamortized fees remaining. We expect a significant portion of these to be recognized later this year. Moving to slide six, deposits were up $410 million for the quarter, as seasonally expected, with our demand deposits up $165 million. Customer balances remained elevated from liquidity associated with various government support programs. Our quarterly cost of deposits declined to 10 basis points, and we continued to add new accounts. Next, on slide 7, you'll see the detailed changes in our net interest income and margin. Net interest income dollars decreased $1.5 million as compared to the second quarter, related entirely to lower PPP forgiveness. The net interest margin was down 12 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 are striving to achieve stability in core net interest income results. Slide 8 shows trends in non-interest income. Excluding securities gains and losses, our fee income was up linked quarter to $40.4 million, or 2.6%. More broadly, non-spread revenue was 34% of our total revenue, which remains a key strength for NBT, and we're pleased with the trajectory of each of the non-banking businesses we're in and continue to believe they are all investable. Retail banking fees were up the linked quarter due mostly to higher card-related activities. Wealth and retirement plan administration fees had another strong quarter on new business wins and market appreciations. Turning to non-interest expense, on slide 9, our total operating expenses were $72.9 million for the quarter, and we continued to demonstrate effective cost awareness. We did incur an additional $2.3 million of non-recurring costs in the quarter related to an estimated litigation settlement. We'd expect core operating expense to drift modestly upward over the next several quarters. 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 12 basis points. Both NPLs and NPAs declined this quarter. Observed credit metrics have been much better than what would have been suggested by the CECL models at this time last year. On slide 11, we provide a walk-forward of our reserves. Clearly, the economic outlook continues to improve, but uncertainty remains elevated. Excluding PPP, our allowance to loans ratio was 128 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 my prepared comments, some closing thoughts. We started 2021 on strong footing and we are pleased with the fundamental results of the first nine months of the year. Stable net interest income, good results from our recurring fee income lines, sustained expense discipline, and exceptional credit quality outcomes have been clear highlights. It's also worth mentioning that we've added over $121 million to capital over these last historically challenging seven quarters, while at the same time paying dividends to our shareholders of $82.8 million and buying back $22.1 million of our own shares. These meaningful capital accumulation results put us in an enviable position as we consider growth opportunities for 2022 and beyond. 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, please press the star, then the one key on your touchtone telephone. If your questions have been answered or you wish to remove yourself from the queue, press the pound key. One moment for our questions to queue up. Our first question comes from Alex Tordahl with Piper Sandler. Your line is open.
spk04: Hey, good morning, guys. Morning, Alex. Morning, Alex. First off, I wanted to, I guess, start with sort of the loan growth outlook. And, John, in your prepared remarks, the $300 million pipeline, that's certainly very helpful. I'm just wondering if you could give us a little bit more color on sort of just, I guess, expectations into next year. You know, are you seeing, in terms of that pipeline, is there some backlog and some catch-up there, or is it continuing to build? Which geographies are the strongest, things like that?
spk01: Sure. I'll talk a little bit about the environment and maybe Scott will supplement after that. Across the platform, we see both on the CRE front and in CNI, lots of activity. I can think of on the CNI side in Central New York and over in Massachusetts, manufacturers looking to invest in their plant and equipment, expand their production lines, and we're actively engaged in supporting them to do that. Multifamily still in the tertiary cities that we serve is active, and the vacancy rates in those cities are very low, demand still high, so we're supporting our Tier 1 developers across the platform there. You know, there's a little lumpiness maybe in some of the pipeline associated with construction loans that we will syndicate once we close. So that will lower the hold to NBT at the closing table. So I wouldn't call it a backlog or pent-up demand, Alex. I'd just call it continued momentum going into next year, and for the obvious reasons. In the last 30 years, it's never been an environment where you could access capital at the levels and at the rates that are available today, and that's a function of excess liquidity on the balance sheets of all the banks. So Obviously, we're trying to manage the yield, and sometimes it's hand-to-hand combat competitively to make sure that we're achieving the return that's appropriate for us on each individual loan. But it's active in various sectors across the whole platform.
spk03: Alex, Scott, I'll jump in, too. A couple of comments, even kind of by line of business, as you had asked earlier. On the commercial side, you know, generally, you know, C&I side, generally flat balances. But as a reminder, you know, that's the group of customers that have significant deposit balances and significant cash on hand today, very, very strong balance sheets. So to the extent that they do have meaningful capital expenditure or business expansion needs, a lot of them have that liquidity already sitting on their balance sheet. You know, John made some comments around commercial real estate. You know, I think we're probably seeing a little bit more robust activity in southern Maine and southern New Hampshire than maybe some of the legacy markets of community bank or, excuse me, of MBT. But I would note that it's pretty strong across the board. There really hasn't been any particular areas that have shown any kind of weakness. Residential real estate will continue to be good for us, I think, getting things through the system from a throughput standpoint. It should be a marvelous time to have an home equity loan if you're a consumer. And quite frankly, I think people are just jumping straight to the residential real estate mortgage because the rates are so low. Why take that risk when they can find such a low-rate instrument? Indirect auto has been interesting for us. Our portfolio is generally just auto. So it does not include things like recreational vehicles or four-wheelers, snowmobiles. We don't do a lot of that. So it's been mostly auto. So the lack of inventory at the dealer level has truly been indicative of the lack of our ability to see a consistent flow of contracts that we might have hoped for at this point in time in the cycle. I don't know whether we're at the bottom relative to outstandings or whether we have another quarter or two to live through with that, but generally we're certainly not projecting huge growth dollars in that for the next couple of quarters, but we'd like to see that going back. No change in our dealer mix that we're engaged with has been very engaging. Specialty lending has really been a bright spot, both on the solar lending and, again, some of the other platforms we participate on, stuff that we like. And kind of as a reminder, that is stuff where we control the credit box. So our partners are using our credit mechanisms. So in terms of the assets that we're putting on the balance sheets, those assets that, you know, that we're, you know, we're pretty fond of and think that there's opportunity. Roll all that together, Alex, you know, mid-single-digit type growth rates, you know, are probably the right prognostication at the current time. And, you know, I think if we see other opportunities in some of our incremental markets, maybe it's a touch better than that.
spk04: Great. Two follow-up questions on that. First, on the specialty lending, is there some seasonality in there? It seems like the third quarter was particularly strong there.
spk03: Yeah, on the specialty side, the third quarter was strong. It really was. So that would probably be the only portfolio I would say that there was any seasonality to in terms of some of the demand things that we were seeing. But as you know, I mean, you know, this whole, you know, technology-enabled assisted lending has really got some legs these days. And, you know, kind of that's our version of that, you know, where things are happening, you know, in more of a real-time basis. And, you know, I'll give you an example. As it relates to solar loans, we'd probably like to convince a whole bunch of those customers to have a home equity loan It would probably be an instrument that longer term would tie better to their personal needs, but it is so easy to work through the process in this solar lending outcome. In fairness, the yields are getting a little bit higher, so we're good with that outcome. Clearly, the installer base on these residential solar projects like the platform that's out there, so I think we could continue to expect some growth there.
spk04: Great. And then I guess the other thing that we've talked about in the past is the paydowns, obviously, in this rate environment. It's been a decent headwind. Do you have any sort of line of sight into larger paydowns that could be coming up in the fourth quarter?
spk03: Yeah, there's a couple, and John, feel free to chime in, but there's certainly a couple larger ones that we're preparing for. And it's interesting. I don't know that we've seen the borrower pay down and utilize their excess liquidity as often as we maybe would have expected in the cycle. You know, I think generally our borrower base is, you know, sort of generally conservative in nature. So kind of much like our balance sheet, they're hoarding some cash. But what we have seen is a little bit of churn in the portfolio, and we have seen the existence of certain either government-sponsored programs where the customer has been able to go to a government program and get a better outcome than they can get from us, and a couple instances of non-banking investors, insurance-related enterprises. More episodic than systematic at this point in time, but at the same point in time, existing.
spk04: Okay, great. That's helpful color. And then just, um, the other question I wanted to just kind of hone in on is, uh, we've seen a little bit of modest pickup in merger activity, uh, within your markets. And I was just hoping that you can remind us, um, in terms of the, uh, for MBTs appetite and for MNA in terms of, um, both geography size, uh, and then just the, um, the appetite from a financial standpoint.
spk01: Well, thanks for that question. And we've had this dialogue going on now for a couple of years, Alex, as you know. You know, this company has been successful for a long time, leading with its organic growth strategies in expansion markets. Right now, those expansion markets are in New England. But we've always said that... if we were to meet a complementary partner who would help advance and accelerate our strategic plans in those expansion markets, that we'd like to form a partnership there. And, you know, it's a function of cultural alignment. It's a function of integration ease. It's a function of how, on a contiguous basis, we can accelerate our expansion. Scott said it earlier. We have lots of optionality right now, plenty of capital. There is activity across our markets, as you suggest. And I would suspect that some of those potential partners are slugging it out through their budget process right now and thinking about what their options are and thinking about whether scale could be a solution to what is a difficult interest rate environment for them next year, and also thinking about what our technology platform might be able to add to their customer base. So those dialogues continue. They're in New England contiguously, in Pennsylvania perhaps, and western New York State selectively. But like I said, we win on organic growth, and we're not looking to do financial engineering. We're looking for long-term strategic value for our shareholders by doing a deal that accelerates what we otherwise would be doing on our own. So we'll see what happens. but we're in a good position to field all calls and make a lot of calls, and we'll see where that takes us.
spk04: And then just in terms of the size that you'd be willing to kind of contemplate, would it be sort of the half a billion to five billion in terms of assets, or how would we frame sort of how you would even, you know, what you'd consider digestible?
spk01: Hey, that's a great floor and a great ceiling there. You know, it's, you know, half a billion up to four or five in that range. I think they're digestible depending on who the partner is, depending on what their lines of business are, how complementary they are, and how aligned we are. But I think that's a good range, Alex.
spk04: And then I guess just, you know, not to sort of beat the dead horse here, but Historically, NBT has really grown organically kind of in the wake of other M&A in some of your geographies. And then the acquisitions that you've done have really been to kind of dive into a geography where you've got really nothing going on or very little going on. You can really accelerate that growth very quickly. Is that how we should sort of think about a deal that, you know, if it was a new market where you didn't have much of a presence, M&A would be much more likely than in a market where you already have some existing infrastructure?
spk01: So I might choose a little different words there, but what I would say is could we advance our strategic growth by being vertically deeper in certain of the markets where we are with low production offices and more limited product offerings? Absolutely. And, you know, there are plenty of opportunities within those geographies where we already are to vertically go deeper and expand our presence, our brand recognition, the product offering, retail, commercial, wealth, insurance. So all of that's quite possible. And then contiguously, where we're comfortable with the dynamics of those markets, I could see us taking a step with the manageable size of meeting all the criteria I previously laid out, to have a conversation and see whether that's possible. So that's how we think about it.
spk04: Thank you for taking my questions.
spk01: Hey, thank you. Good to talk to you.
spk00: Again, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Our next question comes from Eric. Zwick with Benning and Scattergood, your line is open.
spk02: Thank you. Good morning, guys. Morning, Eric. I wonder if I could start, maybe, John, your comments on leveraging market disruption in your Northeast market. And you mentioned, I think you've hired some customer-facing employees as well as some office support. Curious, you know, have you added any lenders or do you have an appetite to add any commercial lenders in any of your markets and what the, you know, kind of level of competition for talent is today.
spk01: Hey, appreciate that question. And it has been very active in New England across the five-state platform. So we have hired customer-facing, primarily commercial lending officers, but also mortgage LOs as well in Maine, New Hampshire, Vermont, Massachusetts, Connecticut. In addition, we've had the opportunity to supplement what goes on in the support units of our company by hiring folks who – perceive that they may not be part of a long-term combined strategy with one of those large acquisitions that's going on. So we've invited onto our team up in Burlington, Vermont, several folks who are supporting the backroom, and the skill sets there match what we otherwise were in the market for, so we're being opportunistic about it. There is a pipeline of folks that, you know, we'll continue to have dialogue with, and as I suggested in my comments, this is a multi-year strategy, and, you know, we'll be at this for months and years as we build on the opportunity that presents itself over time. As you know, in those large transactions, things happen in stages, and at each stage – the potential to meet a new partner or a new team member presents itself, and we're pretty good at knowing who's in the market and who might be willing to have those conversations, and we do that.
spk02: Thanks for the detail there. And then, Scott, you mentioned you expect expenses to drift modestly upward over the next several quarters. One, I guess, can you remind me when annual merit increases are layered into your expense run rate and also just how you would expect the outlook for higher inflation to potentially impact expense growth over the kind of near to midterm?
spk03: Sure, absolutely. So I think generally speaking, if you took the baseline that was the third quarter and extracted out the non-recurring charge that we took, that's a pretty reasonable baseline for where we are today. Merit increases for us are mid-first quarter, you know, not right at the beginning of the year, but certainly usually before the first of March. And, you know, so we would expect, you know, sort of, you know, consistent, you know, mid-low single digits, you know, three-ish percent type of a range for increases in costs associated with merit, as well as a little bit of, you know, the necessity to continue to make sure that we're holding on to our good people if we happen to be in certain instances where we just find ourselves not as competitive as we were the day before. So don't think that's a gigantic risk in a lot of our markets, but it's out there. In terms of other inflationary concerns, Eric, for us, our technology costs are, I don't want to necessarily say they're fixed, but they are determinable. And for most of our larger costs, we're contractually bound, not only with our core system, but with some of the peripheral systems that we're using for a support standpoint. Generally, the fixed side of our branching network is very adequate today, and we do see a couple potentials for some incremental opportunities, but we also probably see some potential where customer traffic behavior would suggest that longer term consolidation or right-sizing opportunities are probably out there for us. But from a general standpoint, I think the third quarter was a good liftoff point to think about. I think it's worthy to trend salaries and benefits forward into 2022 at a 3% to 4% rate. And then probably add a little bit of expenses into our other buckets because we probably expect to have a higher level of engagement with our folks and a little bit more travel, probably a little bit more outside of the building education, meetings, you know, things that even customer-type outcomes that, you know, we would expect would add a little bit to that. But nothing off the charts.
spk02: That's helpful. Thanks. And then with regard to the remaining PPP unamortized fees, I think it's $10.5 million of the balance. You mentioned kind of a significant portion to be realized later this year. Is that, I'm just trying to think about that. Is it, you know, potentially 50% or greater in 4Q and then the rest over the next, I guess, the first part of 22, is that the right way to think about it?
spk03: It's the right way to think about it. Probably more than half in the fourth quarter. We've already had really noticeable activity on forgiveness here in the month of October. And so I think that's a good way to frame it. I also think that remembering that they won't all necessarily go away in just the first couple of quarters of the year. There are going to be those stray assets out there that will probably get into, you know, just an amortizing 1% loan. So some of those will go a little bit longer. I don't think that will be a huge group for us, but, you know, a little bit longer. But you'll probably see a little bit of, you know, quote, PPP forgiveness and fee benefit the first couple quarters of the year, and then I think it would taper off to the point where it clearly will not be material to the outcome. Great.
spk02: Thank you so much for taking my questions today. Thank you, Eric. Thank you.
spk00: Thank you. And I'm shown no further questions at this time. I'd like to turn the call back to John Watt for his closing remarks.
spk01: Thank you. And in closing, I want to thank all of you for participating in our call and for your interest in NBT. And as always, Scott and I are available for any follow-ups, so please reach out and And as Scott suggested, in 2022, we look forward to seeing more of you in person as the ability to be out there and be safe presents itself. So thank you, everybody, and have a great day.
spk00: Thank you, Mr. Watt. This concludes our program. You may now disconnect. Everyone, have a great day.
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