NBT Bancorp Inc

NASDAQ:NBTB

Earnings Call Transcript 2020-Q4

[Operator]

Good day, everyone. Welcome to the NBT Bancorp Fourth Quarter 2020 Financial Results Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com.

Before the call begins, NBT's management would like to remind listeners that, as noted on Slide 2, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to turn the conference over to NBT Bancorp President and CEO, John Watt, Jr., for his opening remarks. Mr. Watt, please begin.

[John Watt, President, CEO & Director]

Welcome, and thank you for joining us today for NBT's earnings call covering our fourth quarter and full year 2020 results. Joining me to review highlights with you are NBT's Chief Financial Officer, John Moran; and our Chief Credit and Risk Officer, Amy Wiles. Following our remarks, we will take your questions.

The events of 2020 were unexpected and unprecedented. With that said, NBT enters this year with momentum on many fronts. Our strong and diversified balance sheet; our capital base, which was enhanced by an opportunistic capital raise; and the resilient performance of our credit portfolios in 2020 provides us the optionality to grow in 2021, as we did when we exited the financial crisis.

Our mortgage business experienced record production in 2020, and the pipeline is at an all-time high for this time of the year. Since last August, our indirect auto originations continue to build month-over-month. Commercial loan production in 2020 was close to $1 billion and the pipelines are active and building across our 7-state platform. Finally, our fee-based wealth and retirement services platforms exited the year strongly and are well positioned for 2021, with assets under management and under administration at record highs.

This outcome demonstrates the core underlying strengths of our organization in a year like no other. Strong customer relationships managed by our focused team of bankers are continuing to result in positive outcomes related to the management of deferrals, which Amy will discuss.

We have already funded our first PPP loans in the latest round of the program and plan to lean heavy into this program to support Main Street businesses across our footprint. NBT achieved earnings of $0.78 per share for the fourth quarter and $2.37 for the year after a $4.8 million onetime charge associated with branch optimization that will yield significant expense saves going forward.

Finally, yesterday, the Board approved a $0.27 dividend payable on March 15 and reloaded our stock repurchase program to double the number of shares authorized to 2 million.

To talk in greater detail about our financial performance, I will turn the call over to our Chief Financial Officer, John Moran.

[John Moran, EVP & CFO]

Thanks, John. Turning to Slide 4. As John highlighted, our fourth quarter earnings per share were $0.78. We did record $4.1 million of branch optimization charges this quarter and a total of $4.8 million of such charges for the year. That puts adjusted earnings per share at $0.85 for the quarter and $2.46 for the full year. As you can see, the provision for loan losses was down as compared to 3Q levels and down substantially from the levels of the first half of 2020. Charge-offs ticked up to 22 basis points, excluding PPP loans, but remained below historical averages. Our reserve coverage decreased slightly to 1.56%, excluding PPP loans from 1.62% in 3Q. Our underlying operating performance continues to hold in well with pre-provision net revenue of just under $50 million, up 11% as compared to the year ago period.

Tangible book value per share continued to grow, up 2%, with TCE up 14 basis points, and our CET1 ratio improving 21 basis points as compared to the third quarter.

Slide 5 shows trends in outstanding loans. On a core basis, excluding PPP, loans were up $22 million for the quarter. As John suggested earlier, commercial activity has steadily improved as we exited the year with good momentum in several of our businesses. Substantially, all parts of our footprint remain reopened more fully, and pipelines continue to rebuild in both consumer and commercial lending. Line utilization remains a headwind, but new originations have been fairly brisk.

Moving to Slide 6. Deposits were up about $125 million point-to-point for the quarter, with our core deposits up and even stronger $150 million. Customer cash remains elevated on increased liquidity associated with various government support programs. As we highlighted last quarter, these deposits have remained stickier than we would have expected. We have continued to actively manage our funding costs, both in the exception priced book and in rack rates. Those actions, combined with higher levels of demand deposits, are evident in our low 17 basis point cost of total deposits.

The additional deposit pricing actions we took during the quarter helped support our margin. While we do have some opportunities to lower costs in our back book, particularly around legacy CDs, the majority of our planned rate actions are now completed. Core deposit funding has long been a hallmark of the NBT franchise, and we remain very pleased with the results of our active repricing strategy.

Next, on Slide 7, you'll see the detailed changes in our net interest income and margin. Mix shift and fees from PPP forgiveness drove a better-than-expected outcome for the quarter. NII was up $2.2 million, and our reported margin increased 3 basis points. Our normalized NIM, excluding the impact of excess liquidity and PPP lending, was fairly stable due to the aforementioned reduction in deposit costs and mix shift towards higher-yielding consumer loans. The fees recognized due to PPP forgiveness provided about 5 basis points of margin support this quarter. Looking forward, as assets continue to reprice in a lower rate environment, we would expect to see core margin compression over the course of '21, excluding the impact of PPP and excess liquidity.

Slide 8 shows trends in noninterest income. Excluding modest securities gains and losses, our fee income was stable linked quarter at $38 million. More broadly, non-spread revenue was nearly 32% of our total revenue, and this remains a key strength for NBT as compared to peers.

Retail banking fees have continued their rebound from 2Q's depressed levels. While higher cash balances have held service charges at lower levels compared to a year ago, they improved from third quarter. ATM and debit card fees have continued to demonstrate better growth than we would have expected as activity levels improved over the course of 2020, but were modestly lower in 4Q versus 3Q on normal seasonality.

The RPA line benefited from our recent ABG acquisition and most other lines were stable. Other revenue was up on strong swap income. Turning to noninterest expense on Slide 9. Our total operating expenses were just over $75 million for the quarter. Adjusting for the $4.1 million in branch optimization charges, our core operating expenses were $71 million. Increases in several categories were driven by timing and normal seasonality. The other expense line included approximately $1 million of increase in the provision for unfunded commitments as pipelines were up and line utilization was down. We have continued to effectively manage our expenses and our net overhead ratio remains below peers. We're pleased with that outcome, and we remain committed to operational excellence while focusing on managing our cost structure.

During 2020, plans to consolidate 10 branches or 7% of the footprint were approved. We expect to realize about $2.5 million in annualized savings from these actions.

On Slide 10, we provide an overview of key asset quality metrics. Excluding the impact of PPP, net charge-offs remained lower than normal at 22 basis points. Both NPLs and NPAs moved higher again this quarter, but they remain at low levels in the absolute. Amy will provide some more detail on migration in a moment, but we are continuing to benefit from the diversity and granularity of our loan portfolios, the prime nature of our consumer book and our conservative underwriting.

As Amy will share, our deferrals are now running at 1.5% of total loans, down from a peak of approximately 15% during the second quarter. On Slide 11, we provide a walk forward of our reserve from the prior quarter to year-end and the reserve allocations by loan category.

In terms of outlook on provisions, clearly, the economic outlook continues to improve, but there is still uncertainty around the path of the virus, vaccine rollout and compliance and ultimately, the efficacy of the latest stimulus package.

Excluding PPP, our allowance to loan ratio was 156 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 and balance sheet growth will be heavier factors in future provisioning needs versus the model-driven reserving that we experienced in the first 2 quarters of 2020.

With that, I'll turn it over to Amy Wiles, our Chief Credit Risk Officer, for some additional details on the credit front. Amy?

[Amy Wiles, EVP and Chief Credit & Risk Officer]

Thank you, John. The return to pay ratio on deferrals has continued to be very strong at 88% bank-wide, reducing total deferrals substantially from their peak of $1.1 billion to $107 million as of January 19 or down to 1.5% of total loans.

Our larger commercial loans represent the largest category of deferrals at 81% or $86 million, which represents 2.8% of the commercial portfolio. Our small business is very strong, with only $2.7 million on deferral or 0.5% of the total portfolio.

We have completed modifications on all loans and commercial that needed additional forbearance beyond 180 days, and these are included in the numbers shown here and have various maturities that run through the fourth quarter of 2021. This represents only 11 relationships. So it's a very manageable number and represents 77% of all commercial deferrals.

Performance in our consumer loan portfolios are particularly encouraging with our home lending, which is our real estate secured and our consumer lending portfolios, each reporting deferrals of less than 1%, down to 0.3% and 0.8% of total portfolio loans, respectively.

It is also noteworthy, we are not seeing an increase in the rate of new deferrals compared to prior years. These positive trends are supported by the stimulus payments and improving unemployment rates in our markets. And I would also note that our consumer portfolios have strong fundamentals at origination, with average FICO scores of 750 and a focus on prime borrowers.

The next slide shows that remaining deferrals are centered in 3 areas. Hospitality represents the largest at 37% of total deferrals. As we've mentioned on our prior calls, these were underwritten with conservative loan-to-value and strong sponsors. And I would note that only 23% of this segment remain on deferral. So we are down just to a handful of credits here. In fact, 2 relationships make up 75% of this total, each with very strong sponsors and strong liquidity and top-tier operating history pre COVID.

Restaurant and entertainment at $15 million is a relatively small number, with only 10% of this segment on deferral and includes some smaller credits. As noted on the slide, virtually all our general retailer and automotive retailers have returned to pay. The remaining deferrals are commercial real estate, primarily office, with only 2% of the total commercial real estate segment remaining on deferral. So again, very manageable and strong results.

I will close by saying we are seeing strong resiliency across the board and are pleased how we ended the year. Back to you, John.

[John Watt, President, CEO & Director]

Thank you, John and Amy. I will mention as we take your questions this morning that also joining us on the call is our Chief Accounting Officer; Annette Burns; Corporate Treasurer, Mark Mershon; and FP&A Manager, Bill Whitaker.

[Operator]

[Operator Instructions]. Our first question comes from Alex Twerdahl with Piper Sandler.

[Alex Twerdahl, Piper Sandler & Co.]

First off, wanted to dig in a little bit to capital and notice you increased the buyback authorization, which is something you guys haven't typically used too much of. So I was just curious if your thought process has changed a little bit around the buyback? And then now that you're above $10 billion, I know there's been a little bit more of a focus on M&A. And I was wondering if you could sort of rank the priorities for capital deployment? And then talk a little bit about what you're seeing out there in the M&A market, if there's - if conversations are picking up? Or any additional color you could give?

[John Watt, President, CEO & Director]

Glad to take that one, Alex. Thank you. You've heard this story from us many times. We primarily allocate capital to our organic growth and our expansion strategies. In addition, we think about M&A, I'll come back to that in a moment. And we feel that it's appropriate to have all of the arrows in the quiver that we would normally have as a bank this size. So we asked the Board yesterday to make sure that we had plenty of flexibility with respect to the buyback. We'll do that opportunistically throughout the year. But that's - and then of course, we approved the dividend yesterday as well. So that's the way in which we think about capital allocation and return of capital to shareholders.

On the M&A front, I think we're in a place where understanding credit a potential partner is going to be manageable. I make - we are fortunate to have had the Durbin amendment pushed out a year. So we can go into 2022 before we feel the impact of the reduction in that fee. That gives us time to keep having the conversations that we've been having and identifying appropriate partners that we had. As we've said in the past, we look for partners that are in the $0.5 billion to $3 billion range as being most appropriate to align with our strategy. We look for them to be geographically contiguous and integratable and aligned cultures. So the time lines there continue for the most part virtual, as you might imagine. But if the environment is more due diligence and more deep understanding of risk has improved, and that will allow us to continue those.

[Alex Twerdahl, Piper Sandler & Co.]

Great. That's good color. And then just as a follow-up, you talked about organic growth as being sort of priority number one, and you alluded to the loan pipes being in pretty good shape. And I was just wondering if you guys have adjusted how you're thinking about loan growth with respect to what you've put on the balance sheet versus selling into the secondary market or any other adjustments that you've made? And then if you have sort of a target for loan growth for the next couple of quarters that you could share with us?

[John Watt, President, CEO & Director]

I'll give you a little color about - with respect to the markets, and then I'll turn it over to John to talk about targets we've set for ourselves. So I've been on the phone now all week-long across our 7-state platform. The pipelines in New Hampshire, in Connecticut, in Maine and Central New York are building and active. This week, there was a flurry of screenings of new opportunities. What I will observe is it's competitive, and we're going to have to fight hard to maintain appropriate structure and pricing, but there is activity. I'm particularly excited about the pipeline that's building in Connecticut. Focus there is sort of lower end of commercial, high-end business banking and we've got a great team in place there, a team that has been learning about NBT under the radar during the pandemic and is now ready to execute on that pipeline and that momentum makes us feel pretty good. So - and that sort of color across the markets. John, why don't you handle the targets we've set for ourselves.

[John Moran, EVP & CFO]

Yes. Alex, how's it going? So I think John alluded to it. The pipelines are pretty full. Activity is certainly picking up. Production last year was a really good story. Translating that production into net growth has been a little bit more challenging, given some of the headwinds that we faced on paydowns and line utilization. I think as we look forward, certainly, we're cautiously optimistic that we'll be able to get back to sort of historical growth rates in terms of net loan growth on the balance sheet into next year. The one thing that we did sort of shift in terms of strategic approach, we have started the portfolio again in 1-4 family versus selling. And I think that we'll stay flexible around that. That's a lever that we can kind of pull one way or another. But for now, we're going to keep most of that on balance sheet.

[Operator]

[Operator Instructions]. Our next question comes from Matthew Breese with Stephens.

[Matthew Breese, Stephens Inc.]

And maybe just following up on the loan growth question. You mentioned some of the geographies, and it sounds like strength is pretty widespread. Could you maybe give us a little bit of insight as to what lending segments, CRE, C&I, what lending segments are - pipelines are the strongest?

[John Watt, President, CEO & Director]

Sure. In the way, we're seeing, Matt, in the CRE asset class opportunities in multifamily and in warehouse and in Connecticut. We're seeing it in business banking, which is a mix of CRE and C&I and then customers in our core. It's a mix of add-on to C&I relationships and new CRE. We're not seeing nor are we looking for opportunities in retail. And obviously, hospitality needs to mend before we start thinking about new opportunities there. But otherwise, it's a pretty good mix.

[Matthew Breese, Stephens Inc.]

Okay. And then in terms of average new loan yield, I appreciate the detail on Slide 5. The one area isn't provided is commercial real estate. Where are new commercial real estate loan yields coming on at?

[John Moran, EVP & CFO]

Yes, Matt, it's John Moran. Yes. Commercial real estate yields today is kind of mid-2s, so call it 2 50, 2 60, and that begins the book yield that's kind of high 2s, low 3s.

[Matthew Breese, Stephens Inc.]

John, just considering that number 2 50 to 2 60 versus a lot of your peers, it strikes me is maybe, I don't know, I'd call it, 50 basis points lower than what I've heard peers. Why might that be?

[John Moran, EVP & CFO]

I think it's - John and Amy certainly can weigh in here as well. But I think part of it is customer selection and kind of who we're doing business with. So we are not doing a lot of sort of what I would consider BC-type of commercial real estate deals. We're really focused on the best borrowers, the best developers in our markets. And as John mentioned, those tend to be pretty competitive situations. When I think about commercial real estate, 200, 225 over LIBOR plus swap on top, feels about right for an A quality kind of project. Amy, John, I'm not sure if you would add to that.

[John Watt, President, CEO & Director]

No, I'd agree, particularly in New England, very competitive, but we're selective. And we wanted to go down market, we would drive that yield up, but we'd also had outsized risk that is not palatable to us and never has been. So because of the quality of the people we're talking to, there are lots of banks around it, and we got to play hard to win.

[Matthew Breese, Stephens Inc.]

Understood. I appreciate that. And then just switching to the NIM, I know you mentioned that you were likely to see some core NIM pressure throughout the year. Could you maybe quantify what your expectations are? And where we might exit '21? Where is the stabilization point?

[John Moran, EVP & CFO]

Yes. That's a big question. And it's a little bit tough still to get our arms completely around it because there are so many moving pieces with PPP, another round of PPP coming, excess liquidity, it's sort of taking a stab at margin has become more difficult than it would in a normal environment, certainly. What I would tell you is if we take out the impact from PPP lending, the excess liquidity and everything else, I think on a core basis, we're still going to see that kind of, call it, depending on the quarter - I mean, obviously, first quarter has some unique things given 28 days in February. But call it on a core basis, low single digit, mid-single-digit kind of compression in - out of the core book?

[Matthew Breese, Stephens Inc.]

Okay. Understood. Last one for me, just on expenses. You had mentioned that there were several seasonal, it sounds like maybe some higher than usual type expenses this quarter. Could you quantify that for us? And just give us a sense for what you would consider to be the core kind of run rate expenses that we should get to for the first half of '21?

[John Moran, EVP & CFO]

Yes. I think the two biggest pieces of that, Matt, if you're going off of the $75 million, $75.2 million of GAAP expenses is first, $4.1 million in branch optimization; and then second, about $1 million - just under $1 million in unfunded commitments. So if you took those two out, it'd be kind of at a $1.3 million increase in the other line. I would tell you, nothing in particular there. It's just kind of a bunch of little ones that added up. The other big delta would be on the professional fees and outside services line. In there, we ran a little bit heavy just given timing of projects.

On the salaried employee benefits line, a little bit of true up, a little bit of medical in the fourth quarter. So I think if you kind of normalize for those items, it puts you back down into the low-70s, high-60s. I would just remind you, in 1Q, we also have some seasonality. There's spike resets equity comp and some normal - it's wintertime in Upstate New York. So we've got plow and heat and all that. So 1Q can run a little bit heavy for us as well.

[Operator]

[Operator Instructions]. I'm not showing any further questions. I will now turn the call back to John Watt for his closing remarks.

[John Watt, President, CEO & Director]

Thank you. So in closing, I'd like to thank you all for joining us on the call today. Certainly, looking back, 2020 wasn't the year we expected. But we're pretty happy about how we are exiting that year and entering 2021, active pipelines, growing momentum, stability in the markets. So again, we appreciate your participation today and your continued interest in NBT. Have a good day. Thanks.

[Operator]

Thank you to everyone who participated on this conference call for your interest in NBT Bancorp. This concludes today's program. You may disconnect. Have a great day.