Q2 2021 NBT Bancorp Inc Earnings Call
[music].
Good day, everyone weapons of the N V T Bancorp second quarter 2021 financial results Conference call.
This call is being recorded.
It has been made accessible to the public in accordance with the SEC's regulation FD.
Corresponding presentation slides can be found at the company's website at MPT Bancorp dotcom.
Before the call begins in the cheese 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 materially from those projected.
Additionally, certain non-GAAP measures will be discussed.
Conciliations for these numbers are contained within the appendix of today's presentation.
At this time all participants on the listen only mode later.
Later, we will conduct the question answer session and instructions will follow at that time.
Any of them, requiring operator systems and parts of the Starkey and then zero on your Touchtone telephone.
As a reminder, this call's being recorded.
Now I should turn the conference over to ADT Bancorp, President and CEO, John H Watt Junior.
Whereas the opening remarks.
Mr. Watt please begin.
Good morning, and thank you for joining us today for Mbt's earnings call covering our second quarter 2021.
Here with me today are <unk>, Chief Financial Officer, Scott Kingsley, Our Chief Accounting Officer, net Burns and our treasurer, Joe on desktop I'd like the first welcome Scott as he joins me in hosting the first of what will be many and BT earnings calls and as you. All know he is a proven.
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.
Thanks to our net for serving in the role of interim Chief financial officer of consistent leadership and depth.
The result periods 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.
Although there is volatility in the churn the commercial pipeline is strong with commercial loans growing.
<unk> 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 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 our organic growth in new England and to engage.
Gage and other strategic activities and on the subject of capital allocation of our board of directors voted to approve an increase in the quarterly dividend to <unk> 28 per share in support of our commitment to enhancing long term shareholder value since our last call. We welcome Dave Brown President.
<unk> CEO of the capital District, YMCA as our newest director, we look forward of having Dave add his perspective to the discussions at our board table 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 N BT team.
<unk> for their unwavering commitment and many sacrifices throughout the crisis debt and impacted every aspect of their lives. 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.
Thank you John I'm, feeling great happy to be joining the fray and very pleased to be part.
<unk> at M D T turning to slide 4 our second quarter earnings per share were <unk> 92.
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 7 basis points, our reserve coverage decreased slightly.
<unk> to $1.3 8%, 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.
Those 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 the new origination.
The nation's had 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.
The $17.1 million in fees associated with PPP lending and we have $12.6 million in unamortized fees remaining.
We expect the bulk of the 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.
<unk> 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.
Assistant as compared to the first quarter the.
The NIM was down 17 basis points with compression and 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.
The <unk> should always be viewed as a long term value driver looking.
Looking forward as assets continue to reprice in the 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 linked quarter at $39 million more broadly non spread revenue was 33% of our total revenue, which.
<unk> remains a key strength for MBT 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 linked quarter, due mostly to higher card related activities well.
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 noninterest expense slide page 9 of our total operating expenses were $71 million for the quarter and we continued to demonstrate effective cost of awareness we.
We did incur.
For $1.9 million or 3 cents a share of nonrecurring costs in the quarter, including an estimated legal settlement.
We would expect core operating expense to drift modestly upward over the course of the year, especially as our footprint continues to reopen more fully in 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 7 basis points, both mpls and Npa's declined this quarter, we are continuing to benefit from our conservative underwriting and thus far observed credit.
Credit metrics have been much better than what would have been suggested by the seasonal 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.
Excluding PPP, our allowance to loans ratio was.
138 basis points and appropriately conservative estimate of the credit risk in our portfolio today we.
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.
What 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 line and sustained expense discipline are the clear highlights. Moreover, our credit quality.
<unk> continued to exceed expectations with that we're happy to answer any questions. You may have at this time.
Yes.
Thank you anyone with the question at this time from press Star and then 1 key.
Had some telephone if your question is the answered or you wish to remove yourself from the queue.
Of the message basketball hockey.
1 moment for questions.
Yeah.
Our first question comes from Alex Tour at all.
The per Sandler your line is open.
Hey, good morning, guys.
Good morning, Alex.
And welcome Scott.
The first question actually is for John.
So I think if you backed up a couple of quarters as we kind of stare down Durbin.
There would have been maybe some pressure on you guys to kind of do something a little bit more strategic too.
And of overcome the Durbin impact.
The revenue loss, however, it kind of as we sit today.
Certainly.
The entire industry is going to be facing pressure on 2022, just given all of the.
Sort of non repeatable revenue items from 2021 does that.
Potential pullback in AR and the EPS for 2022.
From the industry does that take pressure off of the.
The need to do some of the strategic to kind of.
Phil on the Durbin impact or does it add additional pressure.
So thanks for that question Alex.
The long term strategy here remains the same and the answer 2 of your question is much the same as I gave.
At the end of Q1, which is obviously we recognized.
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 kind of support it's strategic.
The plans and new England or in its core regions.
With that said I think you asked in the last Q, what was the level of the dialog and conversation around the.
Strategic activities and as we exit the worst part of the pandemic like.
Like many other companies.
That level of conversation has risen.
And.
We'll see where it takes us we're very aware of that 2022 is going to have all kinds of.
The pressures that you identified.
But we run this company for the long term and we will get.
Growth sales through 2022.
Into a better environment and if we do it with a strategic <unk>.
<unk> action between now and July that's great, but only if it fits our long term growth plans and is easily integrate of bowl and culturally aligned and geographically.
Our <unk>.
From a whole bank perspective from a 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.
The wealth side.
It's frothy in the insurance World right now.
<unk>.
Private equity driving up valuations, but if we're able to find the appropriately valued.
Potential partner, there will consider allocation of capital to 1 of those deals as well.
So.
As I said in my in my comments.
You know we have lots of Optionality.
Now given this capital base liquidity low credit challenges.
With that Optionality will find the right thing to do.
Great.
And then the switching over to the to the reserve if I remember correctly your seasonal day, 1 reserve was around.
<unk> I think of 106, correct me if I'm wrong.
Today at kind of 131 charge offs actually had been a lot better over the last couple of quarters and even your historic.
Charge offs run rate just kind of curious.
How quickly if you see that sort of.
106 of the endpoint for the reserve how quickly you get there or if actually based on what Youre seeing today the reserve.
She had lower than that.
Great question, Alex and I think generally the consensus is that it starts to go back toward that day, 1 base overtime, but I don't think were.
With that as being a sprint.
Debt that'll be a measured return back to that just given some of the uncertainties that still.
Out there from a market standpoint.
And again.
From a from an underlying.
From an underlying standpoint.
We're looking at better improved results from our net charge offs standpoint, as well as improvements in each of these economic factors.
End of lead you down to that over time.
But I wouldn't expect you would get back to those.
And then just the next couple of quarters.
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.
Okay.
That's it from me thanks for taking my questions. Thank you Alex the clutch Alex Thank you.
Our next question comes from Matthew Breese with Stephens, Inc.
Line is open.
Good morning.
Good morning, how are you the math I'm doing great glad to hear from you both.
Couple of questions from me. So first 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.
And today and maybe some perhaps some some anecdote either whats working is it.
Certain geography or business line or 1 of the things most active.
Happy to do that.
First of all let me talk about the commercial pipeline.
In the category of in the process of the negotiation of approval category.
Categories, 5 and 6 if you're a sales force user.
We have about $250 million, which is about 50% higher than.
Where we were last year when you put on top of that proposal is under development.
The loans that we had bid on there is another $330 million.
That's up 130% from the prior year as well, we see it across the platform of the originations.
In the last quarter.
Just shy of 30% of new England, and the balance was here in our core regions.
We see it in not only CRE, but in the C&I.
We see a.
The really.
Relatively robust pipeline of NR.
Hartford in Central Connecticut market.
As a function of the great bankers debt.
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.
<unk>.
We expect more traction out of.
That.
Effort that we have underway too.
Identify opportunities.
That are the result of that disruption.
So we feel pretty good about that.
We see churn.
And the portfolio clearly in this rate environment.
People are still considering refinancing down in.
For a good customer will do the right thing and retained but.
Sometimes we see competitors doing long term on balance sheet.
Sure.
Offers that were not going to match.
Unfortunate, but we see that when.
We go up against the government agencies.
Offer of 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 1 of our regions.
We're actively out there going.
Head to head.
<unk>.
Clearly pricing is is the challenge with all of our competitors.
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.
Loud us to be successful so I hope that's responsive kind.
Kind of of high fly over commercial in particular.
Now of mortgage pipeline is still strong.
Hi.
Our indirect I'm sorry.
In our specialty lending business.
The demand for residential solar is still very strong and growing so we feel good about that as well.
Great and then you mentioned competitive conditions could you give us some insight into what new loan yields.
Saar coming on the books today versus what's what's existing and then.
Just as a follow up maybe give us some color on.
The core margin outlook, obviously, there is a lot of liquidity.
And the core NII outlook, because it feels like at least in the immediate term those those 2 items could be on diverging paths.
Let me take a shot at that Matt.
If I can give you enough to kind of work with.
In the in the quarter, new commercial originations were very very close to where the.
The where the portfolio actually sits from a yield standpoint.
Within 10 or 12 basis points.
Broadly speaking.
I'm not sure that necessarily the use of trend because as you know sometimes of 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 yields of the combined CRE and C&I portfolio.
Okay.
Jeff I don't think that debt is necessarily a sign that times are out there where the spread widening is underway but.
It will probably take stability in net line at the current time and I think thats pretty good indirect auto for the quarter. The originations were in the $3.35 range.
The blended portfolios a little bit over.
About the war, so yes, some compression still happening there.
And we're not going to chase longer terms that seems to be what what's happening with robust used car valuations.
I think we're finding a lot of our dealers are sitting across from customers and.
The terms are into the 70.
For the 18 month levels, that's not our sweet spot.
And quite frankly, if it.
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 line in that line of business. If you want of back up a little bit relative to net yielded net yields.
<unk>, which is fine.
And Thats, a good asset class from it.
From a duration standpoint.
But we're being judicious on that so you could see growth in net portfolio next quarter or you might see a retraction again.
You can pick either 1 could happen on the resi mortgage side rates are clearly lower than the.
And yield in the portfolio today, probably more of like a 290 being portfolio as opposed to of $3.50, 360 blend in the portfolio.
I still think it's the right thing to do given loss characteristics and.
Just general track record relative to the success on net core product.
The blending but.
But from a general standpoint still compression <unk>.
The net of that and the specialty lending side.
Yields are pretty consistent on a blended mix standpoint, and we are very mixed dependent relative to that specialty lending side.
But our.
Our rates of little bit lower than where the blend is yes. They are.
Terms of the portfolio mix, so I would say of the core basis, if you sort of pushed the PPP noise out of the way in 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.
He doesn't cost us anything from net interest income generation. It just makes the margin look a little ugly.
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.
We're just not comfortable for us relative to the REIT asset classes.
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 1 year 2 year type of blended duration assets.
The change the fed funds rate from 10 or 15 base.
And it points into something.
Between 15 of 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 of 3 to 5 basis points type of compression risk associated with the third and the fourth quarter as we currently sit.
And.
I think we're generally pretty bullish that the volume generation possibilities are enough to keep net interest income kind of consistent with where we were in the second quarter.
Perfect I appreciate that.
The other 1 I had was we are talking a little bit more about the fed hikes.
At some point here could.
Could you just remind us what percentage of the book is floating rate and unencumbered by floors.
Yes.
Yes, let's kind of talk about that.
In no particular order.
The C&I book.
About 50.
I sent floating or adjustable.
The in CRE of about 54% is floating 24% is adjustable.
And what we would call business banking small business lending.
Lower amount of floating 13% 45% of adjustable.
I would kind of look.
<unk> per the indirect auto given how fast that turns and say you get the reprice. Your cash flows there over about a 36% to 40 months period, maybe even a little sooner given.
Sort of the demand today.
The 1 caveat debt dealers I started the hard time finding used cars.
There's no doubt about that and.
And.
What I would say that people are financing an 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%.
In terms of where loans are being closed.
So I think in the total portfolio.
The kind of look at it this way.
Maybe around 40% of the portfolio of floats are adjusted with.
Expected cash flow is still pretty significant.
For the institution. So in the event you actually get a rate hike, which as you know we're in net long line of cheerleaders for that probably over the longer term.
Debt.
I think we would have some opportunity from a repricing none of our forecast rate now indicate that we're going to get some kind of repricing optionality before 2023.
Essentially if I.
<unk> been prognosticating in the past I've, probably been wrong more than had been rate so take that for what it's worth.
Perfect last 1 from me just can I get an update on where you expect the tax rate to come in.
Yes, I think thats sort of the.
Mid 'twenty twos.
With the handful of mix changes could you be as low as 22 could be as high as 23, given sort of the state complement of where we do business.
I think you.
The net range.
Perfect. That's all I had thank you for taking my questions and Scott Great to hear from you again.
Matt I appreciate it thanks, so much.
Again, if the other question. Please press Star and then the 1 key on your Touchtone telephone.
Our next question comes from Erik Zwick with Boenning and Scattergood. Your line is open.
<unk>.
Hi, good morning, everyone.
Good morning, Eric and Eric.
Just 1 question remaining for me today within the press release, you talk about the <unk>.
The expansion in the New England region, and then the new branch in Connecticut, and John I think in 1 of your.
The responses to the loan growth question mentioned some.
He used 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 are new lenders are from that perspective.
Great question Eric.
Recognizing the.
The.
The competitive dynamics I'll stay high level, but acknowledged that.
We have opportunity in Vermont, we have opportunity in mid and southern New Hampshire.
<unk>.
In western mass and.
Clearly.
In Central Connecticut.
<unk>.
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 the.
Hey, Seth.
Several hundred billion dollars 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.
The technology and Treasury management platform to serve 99% of.
All of those potential <unk>.
Aspects.
And we're driving hard to.
Position ourselves when the time is rate over the next.
As of long term.
And our focus here over the next several years to take advantage of that disruption and.
We have been successful of doing it in the past and in this case, we feel really good about where we are now so all of those states Oh, we have of focus.
Uh huh.
I guess in southern coastal Maine, as well add that to the list. There is clearly opportunity there on the fee based side and on the loan side.
And we've got that identified prioritized in.
We're executing there as well.
Thanks I appreciate.
And kind of there that's it from me today. Thanks for taking my question Hey, good to talk to you here.
I'm not sorry, any part of the question I will now turn the call back to John Locke for closing remark.
Thank you and again, thank you all for participating in today's call for a welcoming Scott.
<unk> to our team.
And we look forward to catching up to you either 1 on 1 or in the next quarter.
Be well and be safe. Thank you.
Thank you Mr. Watt. This concludes the concludes the program you may disconnect have a great day.
Okay.
[music].
[music].
[music].
Good day everyone.
Welcome to the MBT Bancorp second quarter 2021 financial results Conference call.
This call is being recorded and is the made accessible to the public in accordance with the SEC's regulation FD.
On the presentation slides can be found of the companies.
At MPT Bancorp the dot com.
Before the call begins.
The team'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 materially from those projected.
In addition.
Dishes.
Certain non-GAAP measures will be discussed.
Reconciliations of these numbers are contained within the appendix of today's presentation.
At this time all participants on the listen only mode. Later, we will conduct the question answer session and instructions will follow at that time.
Any of them, requiring operator systems and parts of the star.
The key 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 MPT Bancorp, President and CEO, John H Watt junior, whereas the opening remarks, Mr. Watt. Please begin.
Good morning, and thank you for joining us today for <unk> earnings call covering our second quarter 2021 results here with me today are <unk>, Chief Financial Officer, Scott Kingsley, Our Chief Accounting Officer, net Burns and our Treasurer, Joe on VESCO I'd like the first welcome Scott as he joins.
Me and hosting the first of what will be many and BT 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 an AD for serving in the role of interim Chief Financial Officer for consistent leadership and depth of experience will support a seamless transition for Scott.
Across the markets. We serve we are seeing building momentum in 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.
The business.
<unk>.
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 or.
Our strong capital base allows for.
Our Welch analogy to fund dividends further our organic growth in new England and to engage and other strategic activities and on the subject of capital allocation of our board of directors voted to approve an increase in the quarterly dividend to <unk> 28 per share in support of our commitment to enhance.
For adding 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 of having Dave add his perspective to the discussions at our board table 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 <unk> team for their unwavering commitment and many sacrifices throughout the crisis debt and impacted every aspect of their in line. The team has pivoted quickly from supporting our customers and communities.
Entities 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.
All yours.
Thank you John I'm, feeling great happy to be joining the fray and very pleased to be part of the team at NTT turning to slide 4 our second quarter earnings per share were <unk> 92.
These results were driven by favorable credit results and strong fee income, we had a negative provision of $5.
Charge offs remained very low at 7 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.
The 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.
2 good momentum in several of our businesses.
Line utilization remains a headwind the new originations had 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.
To have dollars 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 the 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.
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 and asset yields partially offset by lower funding costs.
Excess liquidity net of PPP activity.
And our 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 re price and 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 noninterest income excluding securities gains and losses, our fee income was up linked quarter at $39 million.
<unk> more broadly non spread revenue was 33% of our total revenue, which remains a key strength for MBT 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 linked quarter due mostly to higher card related activities.
Wealth had another strong quarter on new business wins and market depreciation insurance services and retirement plan administration fees were consistent and additive to our mix.
Turning to the noninterest expense slide page 9 our total operating expenses were $71 million for the quarter.
And we continued to demonstrate effective cost of 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 would expect core operating expense to drift modestly upward over the course of the year, especially.
As our footprint continues to reopen more fully in 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 7 basis points, both npls and Npa's 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 seasonal 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.
Quarter.
Excluding PPP, our allowance to loans ratio was 138 basis points and 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.
Elevate 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 stay.
The stable net interest income good results from our recurring fee income line and.
She'd growth and 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.
Yes.
Thank you anyone with the question at this time from Quest Star and then 1 key non.
And you touched on the telephone if your question is the answered or you wish to remove yourself from the queue. Please press the clunky.
1 moment for questions.
Our first question comes from Alex toward all of <unk>.
Hope of Sandler Your line is open.
Hey, good morning, guys.
Good morning, Alex.
And welcome Scott.
First question actually is for John.
I think if you backed up a couple of quarters as we kind of stare down Durbin.
There would have been maybe some pressure on you guys the kind of do something a little bit more strategic too.
Kind of overcome the durbin impact.
Revenue loss, however, it kind of as we sit today.
Generally the entire industry is going to be facing pressure on 2022, just given all of the.
The non repeatable revenue items from 'twenty to 'twenty, 1 does that.
Potential pullback in AR and the EPS for 2022.
Yeah.
Or the industry does that take pressure off of the the.
The need to do some of these strategic to kind of fill in the Durbin impact.
Or does it add additional pressure.
So thanks for that question Alex.
The long term strategy here remains the same and the answer 2 of 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 kind of engage in financial engineering.
And do a transaction that is not otherwise kind of support its strategic growth plans and new England or in its core regions.
With that said I think you asked in the last Q, what was the level of dialogue and conversation around.
Strategic activities then.
As we exit the worst part of the pandemic.
Like many other companies that level of conversation has risen.
And.
We'll see where it takes us we're very aware that the 2022 is going to have all kinds of pressures that you identified.
<unk> identified.
But we run this company for the long term and we will get ourselves through 2022 and.
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.
Both.
The plant and is easily integrate of bowl and culturally aligned and geographically contiguous.
From a whole bank perspective from a from a line of business fee based.
M&A perspective, sure we're always looking to.
Add to the platform on the retirement server.
Vs side.
On the wealth side.
Frothy in the insurance World right now.
Private equity driving up valuations, but if we're able to find appropriately valued.
<unk> partner, there, we will consider allocation of capital to 1 of those deals as well.
No.
As I said in my in my comments.
You know we have lots of Optionality given this capital base liquidity low credit the challenges and with that Optionality will find the right thing to do.
Great.
And then the switching over to the to the.
If I remember correctly your seasonal day, 1 reserve was around I think 1 out of 6 correct me if I'm wrong, you're sitting today of kind of $1.31 charge offs actually had been a lot better over the last couple of quarters and even your historic.
Charge offs run rate.
Just kind of curious.
How quickly.
See that sort of 106 of the endpoint for the reserve how quickly you get there or if actually based on what Youre seeing today.
Sort of actually should had lower than that.
Great question Alex.
Generally the consensus is that it starts.
The reserve back toward that day, 1 base over time, but I don't think were looking at debt as being a sprint.
That'll be a measured return back to that just given some of the uncertainties that still.
Out there from a market standpoint.
And again.
From.
To go underlying.
From an underlying standpoint, better improved results from our net charge offs standpoint, as well as improvements in each of these economic factors kind of lead you down to that over time.
Wouldn't expect you would get back to those.
And then just the.
From a couple of quarters.
Okay and then last question from me the legal settlement reserve that you guys set aside is that related to your indirect auto business.
No.
Okay.
Yeah.
That's it from me thanks for taking my questions. Thank you Alex good to talk to you Alex Thank.
The next our next question comes from Matthew Breese with Stephens, Inc. Your line is open.
Good morning.
Hey, good morning, how are you from that I'm doing great glad to hear from you both.
Couple of questions from me. So first really nice to see continued core loan growth and certainly feels like there is increased optimism on that front can.
Can you just give us a sense for where the commercial and consumer loan pipelines kind of stand today and maybe some perhaps some some anecdote either whats working is it a certain geography or business line or where the things most active.
Happy to do that first of all let me talk about the commercial pipeline.
In the category.
Category of in the process of the negotiation of approval category of 5 and 6 if you're a sales force 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.
<unk>.
Loans that we had bid on there is another $330 million, that's up 130% from the prior year as well.
We see it across the platform of the originations in.
In the last quarter.
Was just shy of 30% in new England, and then the balance was here in our core regions.
We.
And not only CRE, but in C&I.
We see.
Really.
The relatively robust pipeline of NR.
Hartford in Central Connecticut market.
That's a function of the great bankers that.
We're able to recruit to our team and its a function.
C. All of the disruption that's going on as we've discussed in the past, we expect more traction out of.
That.
Effort that we have underway too.
Identify opportunities.
That are the result of that disruption.
And of all we feel pretty good about that.
We see churn in the portfolio clearly in this rate environment.
People are still considering refinancing down in.
For a good customer will do the right thing and retained but.
Sometimes we see competitors.
Selling long term on balance sheet.
Offers that were not going to match.
Unfortunate, but we see that.
We go up against the government agencies, who offer of products and services that.
Would make your head spin.
Terms of their terms and conditions in 10.
The pricing.
And we let those go as well.
But with that said.
The team is really focused in each 1 of our regions.
We're actively out there going.
Head to head.
And.
Okay.
Clearly pricing is 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.
<unk>, 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.
Hope that is responsive.
Kind of of high fly over commercial in particular.
No mortgage pipeline is still strong.
In our indirect I'm, sorry in our specialty lending business are the.
The demand for residential solar is still very strong and growing so we feel good about that as well.
Great and then you know you mentioned a competitive conditions.
<unk> could you give us some insight into what new loan yields are coming on the books today versus what's what's existing and then.
Just as a follow up maybe give us some color on the.
The core margin outlook, obviously, theres a lot of liquidity.
And in the core NII outlook, because it feels like at least in the immediate term.
From those those 2 items could be on diverging paths.
Let me take a shot at that Matt.
See if I can give you enough to kind of work with.
In the in the quarter, new commercial originations were very very close to where the.
The.
The portfolio actually sits from a yield standby.
Endpoint.
Within 10 to 12 basis points generally speaking.
I'm not sure that necessarily is the trend because as you know sometimes of 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 origination slightly above the blended yields.
Of the combined CRE and C&I portfolio.
Okay about that I don't think that thats necessarily assigned that times are out there where the spread widening is underway, but will probably take stability in net line at the current time and I think thats pretty good.
Indirect auto for the quarter the originations were in the $3.35.
5 range.
The blended portfolios 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 what's happening with robust used car valuations.
I think we're finding a lot of our dealers are sitting across from.
Tumors and.
The terms are into the 70% 80 month levels, that's not our sweet spot.
And quite frankly.
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 line in that line of business. If you want to back up a.
A little bit relative to net yielded or net yields.
Which is fine.
And that's a good asset class.
From a from a duration standpoint.
But we're being judicious on that so you could see growth in net portfolio next quarter or you might see a retraction again.
And I can take either 1 could happen.
And on the resi mortgage side rates are clearly lower than the blended yield in the portfolio today, probably more like a 290 being portfolio as opposed to of $3.53.60 blend in the portfolio.
Still think its the right thing to do given loss characteristics and.
Just.
General track record relative to the success on that core product.
But.
But from a general standpoint still compression.
<unk> net of debt on the specialty lending side.
Yields are pretty consistent on a blended mix standpoint, and we are very mixed dependent relative to that.
The specialty lending side.
But our rates of little bit lower than where the blend is yes. They are.
In terms of the portfolio mix, so I would say on the core basis, if you sort of pushed the PPP noise out of the way in Heaven forbid you have to push the liquidity noise out of the way a little bit.
The 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 a it's an opportunity cost we're not likely to jump into an extended duration outcome to get 900.
Probably the dollars deployed it's just not practical.
Just not comfortable for us relative to the REIT asset classes.
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 1 year 2 year type of blended duration assets.
And change the fed funds rate from 10 or 15 basis points into something.
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 of 3 to 5 basis point type compression risk associated with the third and the fourth.
Third as we currently sit.
And.
We're generally pretty bullish that the.
The volume generation possibilities are enough to keep net interest income kind of consistent with where we were in the second quarter.
Perfect I appreciate that.
The other 1 I had.
Was we are talking a little bit more about the fed hikes at some point here.
Could you just remind us what percentage of the book is floating rate and unencumbered by floors.
Yes.
Yes, let's kind of talk about that.
In no particular order.
The C&I book.
It's about 50% floating or adjustable.
In CRE of about 54% is floating 24% is adjustable.
What we would call business banking small business lending.
Lower amount of floating 13.
It's 45% adjustable.
I would kind of look at the indirect auto given how fast that turns and say you get the reprice. Your cash flows there over about a 36% to 40 months period, maybe even a little sooner given.
Sort of the demand today.
With the.
Percent of ABS debt dealers are starting of hard time, finding used cars, there's no doubt about that and.
And what.
Would I say that people are financing of aggressive terms I don't know if I would so much to say that but loan to values on used cars today are clearly above 100%.
In terms of where loans are being closed.
The 1.
So I think in the total portfolio of kind of look at it this way.
Maybe around 40% of the portfolio of floats are adjusted with.
Expected cash flow is still pretty significant.
For the institution. So in the event you actually get a rate hike, which as you know we're a net long line.
The cheerleaders for that probably over the longer term.
Debt.
I think we would have some opportunity from a repricing none of our forecast rate now indicate that we're going to get some kind of repricing optionality before 2023.
Essentially if I'd been prognosticating in the past.
I've, probably been wrong more than I've been right. So.
From what its worth.
Perfect last 1 from me just can I get an update on where you expect the tax rate to come in.
Yeah, I think that's sort of the.
Mid 'twenty twos.
With the handful of mix changes could be as low as 22 could be as high as 20.
3 given sort of the state complement of where we do business I think youre safe in that range.
That's all I had thank you for taking my questions and Scott Great to hear from you again, great and I appreciate it. Thanks so much.
Again, it's the other question. Please press Star and then the 1 Keith touched on the telephone.
Our next.
Question will come from Erik Zwick with Boenning and Scattergood. Your line is open.
Okay.
Hi, good morning, everyone.
Good morning, Eric and Eric.
Just 1 question remaining for me today.
The press release, you talk about the.
The expansion in the New England region, and then the new branch in kinetic.
And John I think in 1 of your <unk>.
Responses to the loan growth question mentioned, some opportunities to maybe capitalize on some disruption.
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 of our new lenders or from that perspective.
Great question, Eric and.
Recognizing the.
The competitive dynamics I'll stay high level, but acknowledge that.
We have opportunity in Vermont, we have opportunity in mid and southern New Hampshire, we have opportunity.
In western.
Stern mass and.
Clearly.
In Central Connecticut.
And that involves not only.
The recruitment.
<unk> of.
High performing bankers, but also the conversion of customers who are in evaluating what's important.
<unk> to them.
Determined that are affiliating with a.
Several hundred billion dollars bank, perhaps is not in alignment with how they want to run their business.
Clearly we've identified.
In each of those markets of.
Opportunities where that might be the case.
<unk>.
And we have the balance sheet, we have the technology and Treasury management platform to serve 99% of all of those potential.
The prospects.
And we're driving hard to.
Position ourselves.
When the time is rate over the next and this is a long term.
The focus here over the next several years to take advantage of that disruption.
We have been successful of doing it in the past.
And in this case, we feel really good about where we are now so.
Oh.
So all of those states Oh, we have of focus.
And I guess in southern coastal Maine, as well add that to the list there clearly opportunity there on the fee based side and on the loan side.
And we've got that are identified prioritized and where.
Of all Scooting, there as well.
Thanks, I appreciate the detail there that's it from me Tonight. Thanks for taking my question.
Good to talk to you here.
And that sort of any type of question I will now turn the call back to John Locke for closing remarks.
Alright, Thank you and.
Again, thank you all for participating in today's call for a welcoming Scott to our team.
And we look forward to catching up to you either want I want all right in the next quarter.
Be well and be safe. Thank you.
Thank you Mr. Watt This concludes our program.
You may disconnect have a great day.