NBT Bancorp Inc

NASDAQ:NBTB

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone. Welcome to the conference call covering NBT Bancorp's Third Quarter 2024 Financial Results. 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 will now turn the conference over to NBT Bancorp President and CEO, Scott Kingsley, for his opening remarks. Mr. Kingsley, please begin.

[Scott Kingsley, executive]

Thank you, Didi, and good morning, and thank you, everyone, for joining us for this call covering NBT Bancorp's Third Quarter 2024 results. With me today are NBT's Chief Financial Officer, Annette Burns; Joe Stagliano, President of NBT Bank N.A.; and Joe Ondesko, our Treasurer.

Our operating performance for the quarter and the first 9 months of 2024 continues to reflect the strength of our balance sheet, our diversified business model and the collaboration and diligence of our team. 

During the quarter, we productively grew loans and deposits across our footprint and improved our net interest margin for the second consecutive quarter as earning asset yields increased incrementally higher than funding costs.

Noninterest income continued to be a highlight, making up 31% of total revenues for the quarter and reaching a new quarterly all-time high. We also declared a $0.34 quarterly cash dividend to shareholders, which was 6.3% above the $0.32 dividend we declared in last year's fourth quarter.

This represents our 12th consecutive year of annual dividend increases, and it demonstrates our commitment to providing consistent and favorable long-term returns to our shareholders. The increase also represents a 27% improvement over the past 3 years. 

In September, we were pleased to announce that NBT reached an agreement to merge with Evans Bancorp, Inc., a $2.3 billion community bank headquartered in Williamsville, New York.

Our partnership with Evans is a natural geographic extension of NBT's footprint into the attractive Buffalo and Rochester markets of Western New York. This expansion into Buffalo and Rochester, Upstate New York's largest 2 markets by population, complements our meaningful presence in Central New York, the Capital District and the Hudson Valley, positioning us as the largest community bank in Upstate New York.

Our integration activities with the Evans folks over the past 6 weeks have reaffirmed our belief that they are a customer, employee and community-focused organization with dedicated and talented professionals. Their openness and engagement have been greatly appreciated. 

We are diligently working through the required filings for both shareholder and regulatory approvals. Pending those approvals, we expect a second quarter 2025 closing. 

In April, it was announced that the U.S. Department of Commerce entered into an agreement with Micron Technology to provide a $6.1 billion grant under the CHIPS and Science Act, the largest to date that will in part support its plans to invest as much as $100 billion in a new complex of semiconductor chip manufacturing plants in the town of Clay near Syracuse.

Although advanced planning and site-specific activities continue to progress, Micron has moved their expected commencement of construction to the second half of 2025. As we've said before, NBT is uniquely positioned to play a significant role in providing financial services to all types of customers and prospects living and working in the Upstate New York Chip corridor.

At this time, I will turn the meeting over to Annette to review our third quarter results with you in detail. Annette?

[Annette Burns, executive]

Thank you, Scott, and good morning, everyone. Turning to the results overview page of our earnings presentation. For the third quarter, we reported net income of $38.1 million or $0.80 per share, an increase of $5.4 million or $0.11 per share from the prior quarter.

Tangible book value per share of $23.83 as of September 30 was up $1.29 per share from the end of the second quarter and was at an all-time high for NBT. The next page shows trends in outstanding loans.

Total loans were up $256 million for the year or 3.5% annualized and included growth in our C&I, commercial real estate, indirect auto and residential lending portfolios. Excluding the other consumer and residential solar portfolios that are in a planned contractual runoff status, loans increased $384 million or 6% annualized.

Third quarter loan yields were up 11 basis points from the second quarter of 2024, reflective of continued higher new origination rates. Our total loan portfolio of $9.9 billion remains very well diversified and is comprised of 53% commercial relationships and 47% consumer loans.

On Page 6, total deposits of $11.6 billion were up $619.3 million from December 2023, with growth in commercial and consumer balances combined with a higher level of municipal deposits. We have included a summary of our deposit mix by type, which shows the diversification and deep granularity of our customer base.

The company's full cycle deposit beta was 31%, and our quarterly cost of total deposits increased 4 basis points from the prior quarter to 1.72%.

The next slide looks at the detailed changes in our net interest income and margin. Our net interest margin in the third quarter of 2024 was 3.27%, which is up 9 basis points from the prior quarter, resulting from 9 basis points of earning asset yield improvement, while our funding costs were consistent with the prior quarter.

The third quarter's net interest income was $4.5 million above the linked second quarter results. The primary drivers to the increase in net interest income were an increase in asset yields and loan growth, while funding costs were stable. The third quarter was minimally impacted from the 50-basis point decrease in the federal funds rate in the middle of December. 

Our asset liability management positioning remains fairly neutral with approximately $2 billion in variable rate loans repricing almost immediately, which requires us to actively manage our funding costs downward to more than offset that impact.

The amount of potential positive lift in yield and the reinvestment of our cash flows from our loan portfolios will be dependent on the shape of the yield curve. The trends in noninterest income are outlined on Page 8. Excluding securities gains and losses, our fee income reached a record high of $45.3 million, an increase of 12.1% from the third quarter of 2023 and was an increase of 4.6% from the previous quarter. 

Our combined revenues from retirement plan services, wealth management and insurance services exceeded $30 million in quarterly revenues for the first time.

As a reminder, consistent with historical trends, the fourth quarter is typically our lowest quarter in revenue generation for these businesses by approximately $0.04 from the linked third quarter.

The diversification of our revenue sources remains a core strength for the company with fee income accounting for 31% of total revenues. Our fee income business lines of retirement plan administration, wealth management and the insurance agency have demonstrated a meaningful 5-year compounded annual growth rate of nearly 10%. 

Moving on to noninterest expense. Our total operating expenses were $95.7 million for the quarter, which is $6.2 million or almost 7% above the linked second quarter. Salaries and employee benefit costs were $59.6 million, an increase of $4.2 million from the prior quarter.

This increase is primarily due to one additional payroll day and higher levels of benefit costs, including incentive compensation. Technology and data services expenses increased $700,000 from the second quarter of 2024 due to the timing of planned initiatives and continued investment in customer-facing digital platform solutions.

We remain committed to managing our noninterest expenses effectively, balancing cost efficiency with the necessary investments to support our engagement with customers and our people. 

On Slide 10, we provide an overview of key asset quality metrics. We recorded a loan loss provision expense of $2.9 million in the third quarter, which was $6 million lower than the prior quarter.

This decrease was primarily due to the establishment of a specific reserve in the prior quarter, lower levels of loan growth in the second quarter and the stabilization of the portfolio prepayment assumptions. Net charge-offs to total loans were 16 basis points in the third quarter of 2024 compared to 15 basis points in the prior quarter. Nonperforming assets to total assets was consistent with the past 3 quarters.

Reserve coverage of 1.21% of total loans was consistent with the prior quarter and covered more than 3x the level of nonperforming loans. We believe that the expected balance sheet growth and continued mix changes will be the drivers of future provisioning needs.

In closing, we were pleased to see net interest margin and net interest income growth for the second consecutive quarter. Our well-balanced organic loan growth, granular deposit base, stable credit quality, strong fee income generation and active expense management contributed to our solid operating performance for the first 9 months of 2024.

The continued strength of our capital position has allowed us the flexibility to provide 12 consecutive years of dividend increases to our shareholders, the ability to support organic growth and to capitalize on opportunities while effectively managing risk. Thank you for your continued support and at this time, we welcome any questions you may have.

[Operator]

[Operator Instructions] Our first question comes from Stephen Moss of Raymond James.

[Stephen Moss, analyst]

Maybe starting with the margin here. Annette, you mentioned the need to offset variable rate loans. Just kind of curious here, how our deposit pricing trends in the early going with the 50-basis point rate cut and kind of how you're thinking about it here going through a potential cycle?

[Annette Burns, executive]

Sure. So, maybe I could frame it this way. When we think about deposit pricing changes and our ability to affect that, we really have about 40% of our book is price sensitive. Probably the most significant being the $3.4 billion we have in money market accounts.

We feel like we can be pretty reactive there. We did do a little bit of downward rate prior to the cut, but we think we can be pretty reactive there. Then we have our $1.4 billion in CDs that we are also pricing downward. I think the loan repricing, the $2 billion is almost immediate and there'll be some timing differences on the deposit pricing side.

[Stephen Moss, analyst]

And then on the asset side, you mentioned cash flows from the loan portfolio will be dependent on the yield curve. Just kind of curious, any updated thoughts around fixed rate asset repricing.

[Annette Burns, executive]

So, we have about $2 billion in cash flows coming off of our loan book annually. So, currently today in the current yield curve environment that we're still repricing higher. This quarter in the past few quarters, we've seen 2 to 3 basis points a month of asset repricing. So, if the yield curve holds up, we continue to expect to see that.

[Scott Kingsley, executive]

Steve, it's Scott. I'll just add to that, that you think about the front end of the curve and the sort of the excitement around the front end of the curve dropping. But the midpoint of the curve, somewhere out in the 3-, 5-, 7-year point of the curve is actually 25 to 40 basis points higher than where we started the year.

So, all in, that's the good news, remembering that we price most of our products off the midpoint of the curve. So, back to the customer expectation and the historical expectation of what the spread was priced off of, as long as that midpoint of the curve stays where it is or moves up a little bit, more likely that our asset repricing is more dependent on that than the front end.

[Stephen Moss, analyst]

So, still roughly, let's call it, 150 to 200 basis point pickup in yield just as loans are repricing at the current curve?

[Scott Kingsley, executive]

Yes. Steve, we would have to get back to you on that based on our mix. But as you know, somebody other than us determines where mortgage rates are. The secondary market tends to dictate that.

And so, if you look at where we are on sort of a line of business, our new originations in most of our consumer and commercial portfolios that aren't residential mortgage are still in the high 6s, low 7% compared to portfolio yields in the low 6s.

So, for that part of the portfolio, I'm going to say a little under than your 150-basis point expectation. On the mortgage side, probably closer to 200. The question is whether that mortgage production will end up on our balance sheet or we will decide based on the mix, whether some of that belongs in the secondary sale activity.

[Stephen Moss, analyst]

And then just one more for me here. Good quarter for loan growth on the C&I side. Just curious the drivers there and how you guys are feeling about the loan pipeline?

[Scott Kingsley, executive]

Yes. Feeling really good about where the pipeline is. Concerted effort to grow on the C&I side, in fact, adjusted some of our objectives and goals along the way to reflect that continued focus.

The hope is that focus on C&I relationships also brings a funding complement to that, that we can capitalize on over time as well. It does not mean that we don't like the commercial real estate opportunities we're seeing. And I think the current environment has allowed us to be a little bit more selective on those. and has also allowed for maybe a little bit of yield spread on an improving basis on the CRE side.

The beauty of our geographic mix is we can also make some of those determinations geographically if markets in Upstate and Central or Eastern New York are allowing for a little bit more opportunity, then maybe we're a little more focused on that. If that opportunity changes and the markets in Northern New England allow for a little bit more spread opportunity, maybe we'll focus our attention there.

So, I feel like we're in a really good spot relative to that mix and how we think about what we'd like to see on the portfolio a year from now.

[Operator]

And our next question comes from Christopher O'Connell of KBW.

[Unknown Analyst]

This is Angel Eiser on for Chris. So, I know you had that elevated incentive accruals this quarter and noted the continued digital investments. How should we be thinking about the expense run rate going into Q4?

[Annette Burns, executive]

So, I think if you were to kind of look at the first 9 months on average, we had probably about $0.03 of additional expense and incentive comp. So, if you take that out, I think you're going to end up in the right place. And then as we think about 2025, I think you take that base and probably thinking somewhere in the 4% to 5% run rate increase for 2025.

[Unknown Analyst]

And just going back to some of the margin dynamics. Did you have a spot margin or spot deposit cost for September? And could you just speak to a little bit how you see the margin trending near term over the next couple of quarters?

[Scott Kingsley, executive]

Sure. I'll take a run at that and let Annette supplement is spot rates for September and the quarterly rates not materially different. So, the stabilization of overall funding costs with the help from the mix improvement that we had in the third quarter kind of demonstrates where we were at the end of the quarter.

In terms of margin dynamic going forward, we are not near-term or long-term prognosticators of that outcome. What we are really focused on is the yield curve going to deliver slope.

We'd be happy if it would just deliver flat today because remember, we've been in such a high level of inversion for the last couple of years. So, I think our outcome will be positively influenced by slope from the front end of the curve to the midpoint and longer ends of the curve. If that continues to materialize, I think we have some potential for upside.

Knowing that on a short-term basis, I think the 50-basis point adjustment on the front end that did impact our variable loans was 25 basis points higher than we had projected. And the question is, can we take that 50 basis points on $2 billion of assets and make the appropriate adjustments in our interest-sensitive deposit funding base timely enough to ward off any kind of reduction in yield.

[Unknown Analyst]

And just last one. Sorry if I missed this, but did you provide a deposit beta assumption for the cutting cycle?

[Scott Kingsley, executive]

We did not. Happy to talk to you or Chris about that offline.

[Operator]

[Operator Instructions] And our next question comes from Matthew Breese of Stephens.

[Matthew Breese, analyst]

Annette, I hate to go back to expenses. It was just a bit higher than I was thinking. I'm just curious, first of all, if it came in a bit higher than what you were thinking.

And then going back to your comments on the outlook and what was kind of unusual. The $0.03 kind of puts to at least on my rough math, maybe $1.8 million. So, is it fair to assume we get back down kind of that 94%, high 93 type level on a quarterly basis next quarter and then grow off that? I just wanted to level set there.

[Annette Burns, executive]

Yes. I think you have heard right about that right. I'm thinking somewhere in the 92% to 94% range as well. And we weren't surprised by that. I think the incentive compensation accrual really related to the strength of our performance for the first 9 months. So, it's just really kind of catching up from that.

[Matthew Breese, analyst]

The NIM performance was really nice, too. I was curious if there was anything unusually high in there, meaning did you recapture some nonaccrual interest or prepaid a bit higher than expected? I just wanted to make sure that the 3.27% NIM for the quarter was something we can work off of from here.

[Annette Burns, executive]

There really wasn't anything unusual in there. I will remind you, there's somewhere around $2.5 million, $2.7 million in accretion run rate, maybe a penny or $600,000 of that relates to accelerated accretion. So, we could have 1 or 2 quarters where that might not be that same level, but that was very consistent with what we've seen in the last 2 or 3 quarters. So, really nothing unusual in our net interest income this quarter.

[Matthew Breese, analyst]

Can you remind us of what drives some of the seasonality within insurance at this point in the year? And maybe just a general kind of some overview and thoughts on the outlook for the 3 biggies, retirement plan, wealth, and insurance?

[Annette Burns, executive]

Yes. So, in insurance revenue, we typically have higher level of commercial renewal rates in the third quarter, and it's really just the timing of when those happen. And that's very typical for what we see every third quarter.

Again, I think from a noninterest income front, if you were to take the 9 months and average them, and that's probably a pretty good quarterly run rate if you're looking into 2025, probably half of the growth that we're seeing year-over-year is market performance driven and the rest is organic growth. So, that's kind of how you can think about it.

[Scott Kingsley, executive]

And then I'll add to that, and I think we've said this before. What we enjoy in each of those 3 business lines, wealth, insurance and benefits administration is scale. So, when we have the opportunity to generate incremental revenue from both organic new customer acquisition as well as market performance, especially in Wealth and Benefits Administration, our ability to capitalize that and actually perform higher at the margin generation level is pretty profound.

So, as you think about that to Annette's point, the first and the third quarter for us tend to be the higher renewal months on the commercial side and probably not unusual, January 1 and July 1 type renewal date. On the property and casualty side of consumer lines, it's pretty haphazard through the year.

I think in benefits administration, sometimes in the first and third quarter, we generate a little bit more actuarial service fees based on the time of the year that those activities are performed. And wealth has a little bit of third quarter activities from some of our compliance and tax preparation services that we provide. That's pretty granular.

Now that we've reached this size where sort of the run rate is $120 million a year from a revenue standpoint, I think some of that seasonality will be less and less noticeable as we go forward.

[Matthew Breese, analyst]

Last one for me, and you tell me if I'm making a mountain out of the mole. But I thought it was notable that your reserves declined just a hair. We're not seeing that a lot this quarter. Obviously, solar and consumer loans are running off. And so, what I'm curious is, as those 2 portfolios continue to run off, is it possible that we start to see a little bit more reserve decline you don't provision quite as much?

[Annette Burns, executive]

That's a great observation, Matt. I agree with you. Some of the reduction in our reserve coverage ratio, again, it wasn't very significant. It's not 1 basis point, really has a lot to do with the mix shift change.

Those portfolios have probably somewhere around a 3% allowance allocation to them shifting into things that are closer to 1% allocation related to the growth that the portfolios that are growing. So, that does have an impact on our allocation or allowance coverage ratio. So, we would continue to probably see that into 2025, a few basis points. And then it will probably level off as those become less and less material.

[Scott Kingsley, executive]

And Matt, I think it's safe to say that our coverage levels have tended to be at the high side of our peer group, probably for the last 2 to 3 to 4 years since the full utilization of the CECL models.

And I think in the appendix to the deck that we have out there to Annette's point, I'm looking at a solar residential coverage ratio of 370% and another consumer coverage ratio of 350% compared to C&I at 73%, CRE at 1%, residential real estate at 1% and auto at 83 basis points. So, as that continues to be a less meaningful portion of our total mix, I would think you would expect that to move down.

[Annette Burns, executive]

I would also point out that unemployment rate is the key driver to the amount of reserves that we need, and that's really been stable over the past few quarters and not meaningfully changing during the forecast period as well as some stabilization in our prepayment assumptions, which just means that our expected life have really stabilized this quarter, which we did not see that last quarter.

[Operator]

I'm not showing any further questions. I will now turn the call back to Scott Kingsley for his closing remarks.

[Scott Kingsley, executive]

I want to thank everyone for participating in today's call and for your interest in NBT, and we will see you early in 2025. Thanks so much.

[Operator]

Thank you, Mr. Kingsley. This concludes our program. You may disconnect. Have a nice day.