Q3 2020 NBT Bancorp Inc Earnings Call
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This call is being recorded and has been made us that's what to the public in accordance with the Fccs regulation FD.
Corresponding presentation slides can be found on the company's website at N.B.P. Bancorp dotcom.
Before the call begins Nbcs 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 Act.
Actual results may differ from those projected.
In addition, certain non-GAAP measures will be discussed.
We conciliations for these numbers.
Our contained within the appendix of today's presentation.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session instructions will follow at that time.
Anyone was fine operator assistance compression Starkey and then zero on your Touchtone telephone.
As a reminder, this call is being recorded.
I would now like to turn the conference over to N.B. teasing, what president and CEO, John H. Watch Junior voice opening remarks Mr. Walker. Please begin.
Yes, ma'am and thank you for joining us today for the NBT third theater earnings cool Yeah.
Chief Financial Officer, John Moran, and our chief credit risk that sure Amy Winehouse will join me in reviewing highlights with you and then we will take your questions.
As I stated in our last.
Yeah, Cool and B T is focused on the long term.
It is in our DNA to prosper and grow in times of disruption.
That was the case during the financial crisis, Andy will be the case now.
Focusing on the health and safety of our employees customers and the communities. We serve we are executing on our plans to expand in new England and acquiring new customers in each of the states, where we do business there.
Well 2020 has required us all to pivot in response to impacts of the COVID-19 pandemic or.
I'm also proud to share that and B T has maintained momentum on key customer focus technology initiatives.
Despite this very challenging environment during the third quarter, we implemented a new digital banking platform for mobile and online banking. This platform offers customers a consistent experience across all devices and delivers many new updated services.
It has allowed us to advance our aggressive digital focus.
We've also launched a new market, leading mortgage origination system from encompass that is supporting digital mortgage origination to provide a streamlined experience for our borrowers.
The accelerated adoption of digital banking by customers propelled by the pandemic serves to reinforce the importance of a well developed long term technology roadmap like the one we have at NBC.
Our ability to implement execute and deliver during this volatile period is a testament to the talent of our team and our focus on our customers.
So let me turn to some financial highlights of the quarter NBT achieved earnings of 80 cents per share demonstrating our core underlying strengths.
Yes. This outcome was supported by a lower provision focused expense control and strong fee based income, including higher income from retirement plan administration fees driven in part by our acquisition of Peoria based a BG on April one.
Through the strong collaboration of our bankers and our borrowers in the last 90 days, we saw loan deferrals dropped to 2% from a peak of 15%.
Amy will tell us more about these efforts.
Finally yesterday the board approved a 27 cents dividend payable on December 15th and reaffirmed our dividend strategy for the quarters ahead.
At the end of September our board of directors expanded the number of board seats and appointed Joanna aims as our newest director.
As the leader in business and in her community. Joanna is a strong addition, who brings new perspective to our board.
So at this time I'll turn the call over to our Chief Financial Officer, John Moran, who will provide greater detail on our third quarter financial performance.
Thanks, John turning to slide four as John highlighted our third quarter earnings per share were 80 cents. There was nothing in the quarter that we'd call out as non core other than the small securities gains.
As you can see the provision for loan losses was down substantially as compared to Twoq elevens and at $3.3 million was actually down from last years third quarter.
Lower than normal charge offs and a slight decrease in total loans led to a modest build in our reserve coverage, which increased to 1.62% excluding PPP loans from 1.59% in Twoq.
Similar to the first half of the year, our underlying operating performance held in well.
The provision net revenue of nearly $50 million was down about $1 million linked quarter, but tracked higher against the year ago period.
Our pp in our return on average assets was 183 basis points tangible book value per share was up approximately 3% Tc. He was up 23 basis points and our CE tier one ratio improved approximately 30 basis points as compared to the second quarter again, this underscores that strong people.
In our provides an engine for capital generation.
Slide five shows trends in outstanding loans on a core basis, excluding PPP loans were down about 1% for the quarter.
As we suggested last quarter commercial activity has reset somewhat lower as compared to the robust levels, we experienced last year and in the early part of 2020 that said activity did increase over the course of the quarter with substantially all parts of our footprint reopened more fully and pipeline continuing to rebid.
Bill This was especially true in new England, where Vermont, Maine, and our newest expansion market, Connecticut are all tracking above plan.
In fact, new England commercial loans are up approximately 35% year over year anchored by strong commercial real estate activity.
Moving to slide six deposits were up just over $140 million point to point for the quarter with our core deposits up an even stronger $190 million.
Customer cash remains elevated on increased liquidity associated with various government support programs and these deposits have been stickier than we would have expected.
We have continued to actively manage our funding costs. Both in the exception price book and in rack rates those actions combined with the higher levels of demand deposits are evident in our low 19 basis point cost of total deposits.
As a reminder, we drove a 50% decrease in funding costs from one cues levels in the second quarter.
While we do have some opportunities remaining in the back book around exception pricing and Cds. The majority of our planned rate actions are now complete.
Core deposit funding has long been a hallmark of the NBT franchise, and we're very pleased with the results of our active repricing strategy to date.
Next on slide seven you will see the detailed changes in our net interest income and margin.
Earning assets increased during the quarter driven by higher levels of cash and investment securities with loans down modestly mix.
Mix shift the ongoing repricing of our assets and excess liquidity caused the decrease in both net interest income and in the margin.
And I was down $2.5 million in our reported margin decreased 21 basis points.
As a reminder, the full five basis points short term impact of our recently issued sub debt is reflected in Threeq is run rate and the impact from excess cash and liquidity cost us an additional three basis points as compared to the second quarter.
The total impact from cash drag is now approximately 10 basis points.
Continued repricing of our assets in the historically low rate environment will put additional pressure on our net interest margin, though at a somewhat slower pace as compared to the last two quarters.
Slide eight shows trends in noninterest income, excluding modest securities gains and losses, our fee income increased $2.8 million from last quarter and was up just over 5% from last year more.
More broadly non spread revenue was nearly 33% of our total revenue as you know this remains a key strength for NBT as compared to peers reach.
Retail banking fees rebounded from Twoq use depressed levels with higher cash balances holding service charges at lower levels compared to a year ago, but improving from the lows of the second quarter.
M. and debit card fees and continued to demonstrate better growth than we would have expected as activity improves the.
The RPK line benefited from our recent LPG acquisition and new business pipelines for epic remained strong.
Well rebounded on very strong markets and finally insurance demonstrated a typical seasonal bounce back from two Q.
Turning to noninterest expense on slide nine our total operating expenses were just over $66 million for the quarter up very modestly as compared to the second quarter.
In a more difficult top line environment, we've continued to effectively manage our expenses and our net overhead ratio improved to a low 104 basis points.
While we're very pleased with that outcome, we are thinking through the appropriate level of operating expenses, we adjust to the new economic realities of a covert world.
As a reminder, last quarter, we announced the consolidation of seven branches. Later this year that will result in a proximately $1 million in annual savings starting next year. As you know we're always focused on operational excellence and we are hard at work on identifying additional opportunities in our cost structure.
On slide 10, we provide an overview of key asset quality metrics.
Excluding the impact of PPP net charge offs for a very low 13 basis points we.
We restarted.
Tumor collection activity during the quarter and we did see better payment result than we would have expected.
Both npls and NPS moved higher but remain at low levels in the absolute.
The migration in Nonperformers was driven by two specific relationships, both of which experienced co bid related issues.
We continue to believe that the diversity and granularity of our loan portfolios. Our long established track record of conservative underwriting and the less dense nature of our upstate New York and New England footprint should help us whether the current environment better than most.
As Amy will share our deferrals are now running at 2% of total loans, which is down from a peak of approximately 15% during the second quarter.
On slide 11, we provide a walk forward of our third quarter reserve build and the reserve allocations by loan category.
In terms of outlook, obviously, the environment remains reasonably fluid.
While the recovery appears to have some traction there is still a great deal of uncertainty around the path of the economy, the ultimate path of the pandemic and future government actions.
That said, we continue to believe that if the current macro forecast more or less holds the path of charge off activity and balance sheet growth are likely to be heavier factors in future provisioning needs than model driven factors.
With that I will turn it over to anyone else, our chief credit and risk officer for some additional details on the credit front any.
Thank you John.
The next slide shows where we stand on bank wide payment deferrals as of October 19th.
The mix is fairly consistent and.
And we've seen substantial progress across all of our portfolios.
Our commercial portfolios continue to represent the majority at 75%.
Consumer at 25% of total deferrals.
We have seen a very high return to pay of 88%, reducing total deferrals to $144 million or 2% of total loans.
This is down from a peak of close to 1.1 billion almost 15% of total loans.
Consumer portfolio stands today at slightly over 1%, which is down from a peak of seven and 9%, respectively and our larger commercial portfolio at 3% is down from a peak at 22%.
This high return to pay rate is consistent across all our portfolios.
The resiliency reflects fundamental strengths of our portfolio.
And improving conditions when business is opening up across the footprint as well as the impact of the fiscal stimulus programs.
The next slide provides a little more detail by portfolio by industry segment.
Restaurants, and entertainment remain the highest at 16% of total deferrals, some of which are bowling and entertainment centers for example.
Followed by hotels at 13%.
Automotive retail is basically one borrower who has notified us they will be returning to pay at the end of the deferral period in November.
Just to comment on our hotel customers.
Many in our footprint support leisure travel and benefited from higher than normal in state travel and as a result posted stronger numbers in July and August and we're in a position to return to pay at the end of the deferral period.
Currently only 11% of our total hotel exposure remains on deferral down from a peak at 69%.
Turning to the next slide you can see a mix of loans currently in deferral compared to peak by portfolio and by industry.
As noted on the slide 88% of our COVID-19 related deferrals have returned to payment as of October 19th.
Even with the loans that required a second deferral only 41% were full deferrals down from 55%.
As we work closely with our customers to have them return to paying interest.
It is also noteworthy that only $20 million or 2% of expired deferrals are greater than 30 days past due.
This includes two relationships and commercial lending totaling $10.8 million that if new moved to nonperforming status as of September thirtyth.
Were the primary drivers of the increase in Nonperformers John mentioned earlier.
And were a direct result of the pandemic starting in the second quarter.
The remaining 9 million, our consumer loans across the various portfolios that have not yet returned to paying status after the maturity of their deferral.
This is where we see a delay in charge offs with some of these appearing in the fourth quarter and why we expect full year charge offs will be higher than year to date levels.
We are also doing portfolio reviews on all credits greater than two and a half million and commercial lending that we're not on deferral.
And are finding our customers are very resilient many industry sectors are seeing strong demand and performance. So we feel we have identified the majority of relationships that will need enhanced monitoring based on what we know today.
With that I will turn it back to John for final remarks.
Thank you John and Amy.
I will mention is we take your questions. This morning that also joining us on the call today is our chief accounting officer, and that earns corporate treasurer, Mark Mershon in RF DNA manager Bill Whitaker.
Thank you.
Anyone with a question at this time can press Star and then the one key on your Touchtone telephone.
If your question has been answered all your western live yourself on the queue. Please press the powerful.
Thank you please limit yourself to one question and one follow up.
One moment for questions.
Our first question comes from the line of Alex Twerdahl with Piper Sandler Your line is now open.
Good morning.
Good morning, Alex.
First off I wanted to see.
Start on the on Eni in the margin I understand there's going to be a lot of volatility with the forgiveness, the PTP et cetera, and liquidity levels, but if we kind of push the NIM aside and just look at and I was wondering if you can maybe talk through some of the levers do you have.
To get Eni to reverse in coming quarters.
Or.
Or if they won't reverse you know kind of what the moving parts are that we should be paying attention to.
Yeah, Alex the big.
Based on an i. dollars, it's going to be liquidity redeployment.
As we said we referenced.
The deposits have kind of been a little bit stickier than we would have guessed.
Yes, I think I think we're going to lean into that a little bit.
Certainly hopeful, but when we look at sort of commercial activity.
Rebuilding pretty much across the footprint, but really especially in new England lately.
We're cautiously optimistic that we will get the loan growth out of that and thats sort of redeploying them.
Productive, earning assets, so and I add dollars I think hopeful that does it.
Bottoming out here.
And as we redeploy liquidity.
Growth in doing it.
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Okay, and when you say bottom bottoming out that would be.
Assuming.
Would that be the core margin or would that be assuming the accelerated PPP fees as well no thats, excluding PDP and.
To be clear and I have dollars kind of bottoming out in turning around margin I think will.
More of our.
Our assets kind of re price off of the belly of the curve in this historically low rate environment, I think we'll see a little bit more compression on the margin.
Thank you for taking my question absolutely.
Absolutely.
Thank you. Our next question comes from the line of pounds or work with KBW. Your line is now open.
Thanks, Good morning, everyone.
Just first a quick question on its just a housekeeping question on other opex in the quarter and what's driving that swing and kind of whats the outlook. There I just want to make sure we understand what's going on there.
Yes, other which was pretty flat on the quarter.
Thank you.
In Colgate World were traveling less there's a little bit less TV going on so.
Some of the things that are that are sort of.
Variable cost in nature are running a little bit slower this year.
Than what they would.
Normal year.
In terms of overall expense outlook.
I, just remind you for fourq tends to be a little bit seasonal and as things get more and more back to some semblance of the new business as usual.
I wouldn't I wouldn't use 66 million core as necessarily.
The right run rate going forward, maybe that ticks up just a touch in fourq.
Then.
Again, ideally if we stay open as an economy I think 21.
A little bit more normalcy.
The expense lines.
Okay. Okay. That's helpful. Thanks, and then on the fee side. So you'd indicated you know the pipeline for FX been good business development Theres been good can you just you know Titan Titan maybe that the outlook a little bit there on on fees and obviously you saw a rebound as you had indicated from the second quarter and just kind of how you are seeing.
Some of those fee lines trending as we move into the end of the year and then 2021, yes.
Yes, so what I would tell you directionally be coming usually down a little bit in Fourq, you, we've got lower mortgage activity typically.
Refinanced a pretty strong we're running about 60 40 purchase refi today, so maybe that buck the trend a little bit more to you, but but.
But there is some seasonality in our lines.
And.
As we look into Fourq, you, maybe fees will come in a touch softer versus threeq.
And then when you look out to next year.
Now he is a terrific add for us the epic business continues to chug, along new business pipelines are very very strong.
Yeah.
We're we're optimistic that we'll be able to continue to grow.
The overall.
The one other kind of wrinkle to consider.
The NSF fees on the on the retail banking side have been running quite a bit lower than what they were a year ago and while were start to see that rebound quarter over quarter on a year over year basis, its still soft and that.
Just the change in client behavior.
And we'll take it.
Cash.
Okay. Okay. That's helpful. And then I just want to make sure on Amy if the comments on credit. So the you said full year net charge offs are going to be higher than year to date, and I think referencing I don't know if it's directly correlated to that to the 9 million that you had said.
Still on that if not move to payment status, but just trying to understand kind of how you're thinking about that you know obviously the elevation of charge offs in the fourth quarter and just again, where that is coming from in some of the assumptions there.
Sure.
You know I'll talk a little bit about consumer on that commercial separately. So to your question on the consumer side, we expect there.
Our percentage of loans that have come off well will come off for all that either have or May go delinquent and moved to charge off in the fourth quarter.
So this is really why we expect.
Charge offs to be a little higher in the queue.
For the Q3.
It's not surprising that normal loss rates will eventually materialize in those portfolios, but theyre just shifted to the back end of Q4 or even possibly into the first quarter 2021. So it's still a little too early to say much more about specific numbers or levels.
And we're working with all of our customers some of which will get modifications that will go into 2021.
Okay.
Yeah, I'll just mention.
We've made a lot of progress as you see on the deferrals, but it's still very early we're only a couple of quarters into that.
The impact of the PDP and a different program.
And Kurt.
Correct.
Comic recovery.
It's difficult to see how that all play out so it's tough to forecast.
And we may not know much more and so really were in 2021 on the commercial side.
Okay. Okay. That's helpful and then lastly, John.
John maybe just on M&A and you guys had mentioned in your opening comments that you know new England, and then parts about state New York or are seeing better activity.
Do you see the pipeline equally improving for M&A potential and in 21, and just maybe if you could give some color as to you know kind of near term plans on on what you could see as it relates to M&A.
Sure.
You know, we believe that into the first and second to 2021, our ability to get visibility into credit portfolios.
It's going to be a lot better than it is today, so lots of conversations obviously occur what their pulmonary given the volatility in those portfolios.
Partners.
Clearly crossing 10 billion the way we did.
Yes on one of the most important tools, we have in that little box, which is.
Accelerate growth by M&A and.
A lot of time over the last 60 days, making sure we understand what that.
Potential road map it looks like.
With that said as I have said to you and others on this call. Many times that our growth is primarily driven by organic and supplemented so.
It so it's not the only tool.
You heard from John.
The relatively small.
Oh well.
Well I appliance and.
Got to be over in new England later, this week visiting with ARX real estate customer.
As a couple of projects that are likely to get launched and on that.
There are others across northern New England looking at.
The same thing so we're optimistic there.
Back to where I started more visibility in the first few months second Q into.
Okay.
There's a.
Looks like.
Okay, great. Thanks for that color on I'll leave it there thanks guys.
Thank you. Our next question comes from the line of Matthew Breese with Stephens, Inc. Your line is now open good morning.
Right and are you great.
Yeah, just on thinking.
Thinking about new loan yields so this quarter. The average loan yields 395, what does the pipeline look like relative to that just so we get a good sense of whats coming on versus rolling off.
Yeah, one loan yields are are clearly under pressure.
I'd say sort.
Sort of across the board any earning asset yields as every bid of.
You know a 150 ish.
Fish basis points.
Lower than it was at the beginning of year. So when you think about a new.
New coming on versus versus existing book there is that there is a gap there.
Okay do you could you could you provide some detail on where we might see that what is that gap and and where we might see if new loan yields were to be the floor. What is what it is.
Yeah, I'd say I'd say book yields in the in the in the quarter were on the Cnine side in the low threes on the commercial real estate side high twos low threes.
Business banking kind of hanging in a little bit a little bit better but you.
Versus the existing book yield Uh huh.
Nice work.
We're going to have we're going to have some pressure there okay.
Okay, and then you discussed a fairly strong loan pipeline.
Obviously, the environment is really challenging on the growth front.
Not necessarily next quarter, but as you think about over the next 12 months or so where do you see gross loans kind of trending to do you see more.
More pressure or do you feel like you can hold it here and expand the overall size.
So.
Clearly.
There are a lot of factors that will influence this statement like or is there going to be additional stimulus on what is its form but.
Putting that aside.
You know it would be.
At our asset size in our interest to.
Dr and slightly grow in.
2021.
We're still in the middle of a budget process still trying to put all of the external factors into that discussion.
We're hopeful that after the election that the Congress comes back in.
Considers more seriously a stimulus to.
Will help bridge us to the other side of the vaccine and at the same time provide stability to.
Many of our small business.
Commercial customers as well as other states.
States and municipalities that.
And an outstanding happen.
Oh, the probability of a little bit of growth next year is strong.
Got it okay.
And just framing the deployment liquidity discussion a little bit.
Cash balances.
Thanks, Lou the short term stuff is hair over 600.
How much of that are you looking to deploy whats the right level and in the near term should we see some that go into the securities portfolio, how much expansion could we see there.
Yeah, you're right.
Look ideally, we wave a wand and have $600 million of loan growth show up next year.
I think that that that's a little bit of a stretch to expect so yeah. Clearly you know sitting a good chunk of that 610 basis points over night.
Is a drag for us it has proven to be a stickier than we would have expected.
So were given to tell in debt Securities you saw us kind of increase the size of the book a little not not as percentage of earning assets in dollars securities.
Order, we're kind of taking our spot.
And we'll take.
Right.
Okay.
Last one from me just what was Pete all in PPP income for the quarter.
Got that number.
Just a second here.
[laughter].
We were $4.6 million on the quarter $1.3 million of that was interest of 3.3 million that was amortization.
Perfect I appreciate taking my questions. Thank you.
Thank you again, if you have a question. Please press star and then the one key on your touched on telephone.
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I'm not showing any further questions I will now turn the call back to John Locke for closing remarks.
Well, thank you Sarah and thanks, all of you who participated in the call. This morning, you know clearly the Fandstan may again, its impacts we are going to be with us for a while but we are nonetheless encouraged by the resiliency of our customers and the markets and the communities we serve and most.
Importantly.
We really are encouraged by the commitment demonstrated by our team. So we look forward to a momentum in the fourth quarter and into 2021.
Well once again, thanks for your participation today operator.
Thank you to everyone who participated on this call for your interest in NBP Bancorp. This concludes today's program you may now disconnect have a great day.
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