NBT Bancorp Inc.

Good day, everyone. Welcome to the NBT Bancorp 4th 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. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. Anyone requiring operator assistance can press the star key, then the zero, on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to NBT Bancorp President and CEO, John H. Watt, Jr., for his opening remarks. Mr. Watt, please begin.

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 seven-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 78 cents per share for the fourth quarter and $2.37 for the year after a $4.8 million one-time charge associated with branch optimization that will yield significant expense saves going forward. Finally, yesterday the Board approved a 27-cent dividend payable on March 15th 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.

Thanks, John. Turning to slide four, as John highlighted, Our fourth quarter earnings per share were 78 cents. We did record $4.1 million of branch optimization charges this quarter in a total of $4.8 million of such charges for the year. That puts adjusted earnings per share at 85 cents 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. Charjovs 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 five 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 six, deposits were up about $125 million point to point for the quarter, with our core deposits up an 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 RAC 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 seven, you'll see the detailed changes in our net interest income and margin. Mixed 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 three 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 mixed shift towards higher yielding consumer loans. The fees recognized due to PPP forgiveness provided about five 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 non-interest 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 non-interest expense on slide nine, 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, an 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 two quarters of 2020. With that, I'll turn it over to Amy Wiles, our Chief Credit and Risk Officer for some additional details on the credit front. Amy?