Q3 2021 NBT Bancorp Inc Earnings Call

Good day, everyone welcome to the MBT 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 N B T Bancorp Dot com.

Before the call begins N B T management would like to remind listeners that as note on slide two 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.

Today's presentation at this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time anyone require 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 N. P. T Bancorp's, President and CEO, John H, what junior for his opening remarks, Mr. Watt. Please begin.

Good morning, and thank you for participating in our earnings call covering MBT bancorp's year to date and third quarter 2021 results.

Joining me today are <unk>, Chief Financial Officer, Scott Kingsley, Our Chief Accounting Officer, and Ed Burns and our Treasurer, Joe on desktop.

Net MBT, we continued 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-19.

The headline for today is that we are pleased to report earnings per share of <unk> 86 cents for the third quarter, which is a consistent and productive results are.

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 and 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 nonperforming 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.

The strength of our balance sheet continues to provide optionality to consider the opportunistic and strategic deployment of our capital.

With noninterest income to total revenue at 34% of our diversified fee based businesses had a great quarter.

In a way 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 bulk 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 welcomed Ruth Mahoney to N V T 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 Keycorp 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.

Turning to slide four our third quarter earnings per share were <unk> 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 one.

Two 8%, 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 five shows trends in outstanding loans on a core basis, excluding PPP loans were up approximately $132 million for the quarter or one 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.

This $21 $1 million in total fees associated with PPP lending and we have $10 $7 million in unamortized fees remaining we.

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 a $165 million customer.

Customer balances remained elevated from liquidity associated with various government support programs are.

Our quarterly cost of deposits declined to 10 basis points and we continued to add new accounts.

Next on slide seven 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 asset yields partially offset by lower funding costs.

Excess liquidity net of P. P. P 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 eight shows trends in noninterest income.

Excluding securities gains and losses, our fee income was up linked quarter to $44 million or two 6%.

More broadly non spread revenue was 34% of our total revenue, which remains a key strength for N V T 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 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 appreciation.

We did incur an additional $2 $3 million of nonrecurring costs in the quarter related to an estimated litigation settlement.

We would 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 N P. As declined this quarter.

Observed credit metrics have been much better than what would've been suggested by the seesaw models at 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 P. P P. Our allowance to loans ratio was 128 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 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 out.

<unk> 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.

Okay.

Thank you.

Yes.

Anyone with a question at this time. Please press the Star then the one key on your Touchtone telephone if your questions had been answered or you wish to remove yourself from the queue press the pound key.

Moment for our questions to queue up.

Our first question comes from Alex <unk> with Piper Sandler.

Your line is open.

Hey, good morning, guys.

Good morning, Alex Good morning, Alex.

First off wanted to I guess start with the sort of the loan growth outlook and John in your prepared remarks that 300 million pipeline Thats certainly very helpful.

Wondering if you could give us a little bit more color on sort of just.

I guess the expectations into next year.

Are you seeing.

In terms of that pipeline is it is there some backlog and some catch up there or is it continuing to build.

Which geographies are the strongest things like that.

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 Cri CRE front end in C&I lots of activity.

I can think of on the C&I 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 is still in the tertiary cities that we serve is active in.

In those cities are very low demand is still high so we're supporting our.

Tier one developers across the platform there.

There's a little Lumpiness maybe.

In some of the.

Pipeline associated with the.

Construction loans that we will syndicate once we close so that will lower.

The hold two N V T at the closing table so.

I wouldn't call it a backlog or pent up demand Alex I'd just call. It a continued momentum going into next year and for the obvious reasons.

In the last 30 years, it's never been.

In 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.

Alex Scott I'll jump into.

A couple of comment even kind of by line of business as you had asked on.

On the commercial side.

Generally C&I side generally flat balances, but as a reminder, 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 a meaningful capital expenditure or business expansion needs a lot of them have that liquidity already sitting on their balance sheet.

John made some comments around commercial real estate.

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.

Accuse me of MBT, but I had.

I would note that its pretty strong across the board there really isn't there.

There really hasnt been any particular areas that are showing 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 and home equity loan. If you are 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 why take that risk when they can find such a low rate instrument.

Indirect auto has been interesting for US you know 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 for the lack of inventory at the dealer level.

He has truly been indicative of.

The lack of our ability to.

To see a consistent flow of of contracts that we might have hoped for at this point in time in the cycle.

So whether we're at the bottom relative to Outstandings, rather we have another quarter or two to live through with that but generally we're certainly not projecting huge growth dollars in debt for the next couple of quarters, but we'd like to see that going back.

No change in our dealer mix everybody is still.

You know that we're engaged with has been very engaging.

Specialty lending has really been a bright spot.

Both on the <unk>.

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.

From a determinant in terms of the assets that we're putting on the balance sheet.

Net.

We are.

We're pretty fond of and think that theres opportunity roll all that together Alex.

Mid single digit type growth rate.

Are probably the right prognostication of the currency.

Time, and I think if we see other opportunities in some of our incremental markets, maybe it's a touch better than that.

Great.

Two follow up questions on that first on the specialty lending as there was some seasonality in there it seems like the third quarter was particularly strong there.

Yeah on the specialty side, the third quarter was strong.

Really was and.

So that would be the one that would probably be the only portfolio I would say that there was any seasonality to it.

Terms of.

Some of the demand things that we were seeing but as you know this.

This hole.

Technology.

<unk> enabled.

Lending is really got some lag that these days.

Kind of that's our version of that where things are happening.

And more of a real time basis and.

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 is a longer term is.

It would tie better to their personal needs, but it is so easy to work.

Worked through the process and the solar lending outcome and in fairness deals or get a little bit higher. So we're good with that outcome and clearly the installer base on these are rare.

Residential solar projects like the platform that's out there. So I think we can continue to expect some growth there.

Great and then I guess the other thing that we've talked about in the past as the pay downs, obviously interest 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. Yes. There is a couple and John feel free to chime in but there is certainly a couple of larger ones that we're preparing for.

And it's interesting I don't know that we've seen the borrower paid down and utilize their excess liquidity as often as we maybe would have expected in this cycle I think generally our borrower base is.

Generally conservative in nature, so kind of much like our balance sheet Theyre hoarding some cash.

But what we have seen is a little bit of churn in the portfolio.

And we have seen the.

The existence of certain either government sponsored programs where the.

Customers have been able to go to a government program and get a better outcome than they can get from us and a couple of 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.

Okay, Great. That's helpful color and then just.

The other question I wanted to just kind of hone in on is we've seen a little bit of modest pickup in merger activity within your markets and I was just hoping that you can remind us in terms of.

For Mpc's appetite for M&A in terms of.

Geography.

<unk>.

And then just.

The appetite from a financial standpoint.

Well, thanks for that question and we.

<unk>.

At this.

Dialog going on now for a couple of years, Alex as you know.

This company has been successful for a long time, leading with its organic growth strategies and expansion markets right now those expansion markets or 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 and those expansion markets that we'd like to form.

Form a partnership there.

It's a function of cultural alignment, it's a function of.

Integration is 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 you know 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.

Thinking about whether scale could be.

A solution to what is a difficult interest rate environment for the next year and also thinking about what our technology platform might be able to add to their customer base. So those dialogues continue there.

England contiguous Lee.

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.

We'll see where that takes us.

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 $5 billion in terms of assets or how do we frame sort of how you would even.

What you would consider digestible.

That's a great.

Low floor and a great ceiling there.

And I'll have 1 billion up four or five in that range.

I think they are digestible, depending on who the partner is depending on what their lines of business are complementary they are in.

How aligned we are but I think thats a good range Alex.

And then I guess, just not to sort of beat the dead horse here, but historically MPT has really grown organically kind of in the wake of other M&A and 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 with very little going on you can really accelerate that growth very quickly.

Is that how we should sort of think about a deal that 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.

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 other markets, where we are with loan 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 in.

Expand.

Our presence our brand recognition the product offering retail commercial well.

<unk> insurance.

All of that.

Quite possible and then contiguous Lee.

Sure.

We're comfortable with the dynamics of those markets.

I would see us taking a step with a manageable size meeting all the criteria I previously laid out.

To have a conversation and see whether thats possible. So.

That's how we think about it.

Thank you for taking my questions.

Thank you and good to talk to you.

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 Erik Zwick with Boenning and Scattergood. Your line is open.

Thank you good morning, guys.

Morning, Eric.

I'm wondering 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.

I'm curious have you added any lenders or do you have an appetite to add any commercial lenders in any of your markets and what the.

Kind of level of competition for talent is today.

Hey, I 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 loans 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 thats going on so we've invited onto our team up in Burlington, Vermont, several folks who are supporting.

The back room.

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 will.

We will continue to have dialogue with them as I suggested in my comments. This is a multiyear strategy.

We'll be at this for.

<unk> 10 years as we build on 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.

A new partner or a new team.

Team member presents itself and we're.

We're pretty good at knowing who's in the market and who might be willing to have those conversations and we do that.

Yeah.

Thanks for that 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 when annual merit increases.

Our layered into your expense run rate and also just how you would expect the outlook for higher inflation could potentially impact expense growth over over the kind of near to midterm.

Sure absolutely so.

Generally speaking if you took the baseline that was the third quarter and extract it out the nonrecurring charge that we took.

Any reasonable baseline for where we are today merit increases for us our mid first quarter.

Not right at the beginning of the year, but certainly usually before the first of March.

And so we would expect sort of.

Consistent.

Mid low single digits, three ish percent type of a range for increases in costs associated with merit as well as a little bit of.

The necessity to continue to make sure that we're holding onto our good people if we happen to be.

In certain instances, where we just find ourselves not as good.

Were the day before.

Don't think that's a gigantic risks in a lot of our markets, but it's out there.

In terms of other inflationary concerns generic 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.

It's very adequate today, and we do see a couple of 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 from a general standpoint, I think the third quarter was a good lift off point to think about I think it's worthy to trend.

Salaries and benefits forward into 2022 out of 3% to 4% rate.

And then.

I'd, 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 at a little bit more travel.

Probably a little bit more outside of the building education meetings.

Things that you'd even customer type of outcomes.

We would expect would add a little bit to that but but nothing off the charts.

That's helpful. Thanks.

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 as potentially 50% or greater than <unk> and then the rest over the next I guess the first part of.

22 is that the right way to think about it.

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.

Just the first couple of quarters of the year, there are going to be those stray assets out there that will probably get into just an amortizing 1% loan. So some of those will go a little bit longer don't think that'll be a huge group for us but.

A little bit longer, but you'll probably see a little bit of quote PPP forgiveness and fee benefit in the first couple of 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. Thank you so much for taking my questions today. Thank.

Thank you Eric.

Thank you and I'm showing no further questions at this time I would like to turn the call back to John <unk> for his closing remarks.

Thank you and in closing I want to thank all of you for participating in our call and for your interest in NPT and.

As always Scott and I are available for any follow ups. So please reach out.

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.

Thank you Mr. What this concludes our program you may now disconnect everyone have a great day.

Okay.

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