Q3 2024 NBT Bancorp Inc Earnings Call
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Speaker Change: Good day everyone. Welcome to the conference call covering NBT Bank Corb'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.
Speaker Change: Car Spawning Presentations Slides can be found on the company's website at NBTBankHorbed.com.
Speaker Change: before we call begins, MBTS Management would like to remind listeners that as noted on slide two, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission.
Speaker Change: Actual results may differ from those projected.
Speaker Change: and Edition, certain non-Gat measures will be discussed.
Speaker Change: Reconciliation for these numbers are contained within the appendix of today's presentation.
Speaker Change: At this time, all participants are an illicit only mode. Later, we will conduct a question and answer session. Instructions will follow at that time.
Speaker Change: as a reminder this call is being recorded. I will now turn the conference over to NBT Bank Corps President and CEO Scott Kingsley for his opening remarks. Mr. Kingsley, please begin.
Scott Kingsley: Thank you, DD and good morning and thank you everyone for joining us for this call covering NBT Bank for 3rd quarter, 2024 results. With me today, our NBT's Chief Financial Officer Annette Burns, Joe Stegliano, President of NBT Bank NAA, and Joe Andesco, our treasure.
Scott Kingsley: Our operating performance for the quarter in the first nine months of 2024 continues to reflect the strength of our balance sheet, our diversified business model and the collaboration and diligence of our team.
Scott Kingsley: During the quarter, we've productively grown loans into 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.
Scott Kingsley: Known, it's your sin come continued to be a highlight, making up 31% of total revenues for the quarter and reaching a new quarter league all-time high.
Scott Kingsley: We also declared a 34 cent quarterly cash dividend to shareholders, which was 6.3% above the 32 cent dividend we declared in last year's fourth quarter.
Scott Kingsley: 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 three years.
Scott Kingsley: In September, we were pleased to announce that NBT reached an agreement to merge with Evans Bank Corp and corporate it, a $2.3 billion community bank headquartered in Williamsville, New York.
Scott Kingsley: Our partnership with Evans is a natural geographic extension of NBT's footprint into the attractive buffalo and Rochester markets of Western New York.
Scott Kingsley: This expansion into Buffalo and Rochester, Upstate New York's largest two markets by population. Compliments are meaningful presence in Central New York, the capital district, and the Hudson Valley, positioning us as the largest community bank in Upstate New York.
Scott Kingsley: Our integration activities with the Evans folks over the past six 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.
Scott Kingsley: We are diligently working through the required filings for both shareholder and regulatory approvals. Pending those approvals, we expect a second quarter of 2025 closing.
Speaker Change: 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.
Speaker Change: that will impart support its plans to invest as much as $100 billion in a new complex of semi-conductor chip manufacturing plants in the town of clay near Syracuse.
Speaker Change: Although advanced planning and site-specific activities to continue to progress, Micron has moved their expected commencement of construction to the second half of 2025.
Speaker Change: 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 U.S. State New York chip corridor.
Speaker Change: At this time, I will turn the meeting over to Annette to review our third quarter results with you in detail. Annette?
Annette Burns: Thank you, Scott, and good morning, everyone.
Annette Burns: 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.
Annette Burns: Tangible book value per share of $23.83 as of September 30th was up $1.29 per share from the end of the second quarter and was at an all-time high for NVT.
Annette Burns: 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.
Annette Burns: Excluding the other consumer and residential solar portfolios that are in a planned contractual runoff status, loans increased $384 million, or 6% annualized.
Annette Burns: Third quarter loan yields were up 11 basis points from the second quarter of 2024, reflective of continued higher new origination rates.
Annette Burns: Our total loan portfolio of $9.9 billion dollars remains very well diversified and is comprised of 53% commercial relationships and 47% consumer loans.
Annette Burns: 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.
Annette Burns: We have included a summary of our deposit mix by type, which shows the diversification and deep granularity of our customer base.
Annette Burns: The company's full cycle of deposit beta was 31% and our quarterly cost of total deposits increased four basis points from the prior quarter to 1.72%.
Annette Burns: The next slide looks at the detailed changes in our net interest income and margin.
Annette Burns: 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.
Annette Burns: 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.
Annette Burns: The third quarter was minimally impacted from the 50 basis point decrease in the federal funds rate in the middle of December.
Annette Burns: Our asset liability management positioning remains fairly neutral with approximately two billion in variable rate loans repricing almost immediately, which requires us to actively manage our funding costs downward to more than offset that impact.
Annette Burns: The amount of potential positive lift in yield in the reinvestment of our cash flows from our loan portfolios will be dependent on the shape of the yield curve.
Annette Burns: The trends in non-interest income are outlined on page 8.
Annette Burns: Excluding securities gains and losses, our fee income reached a record high of $45.3 million, an increase of 12.1 percent from the third quarter of 2023, and was an increase of 4.6 percent from the previous quarter.
Annette Burns: 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,
Annette Burns: The fourth quarter is typically our lowest quarter in revenue generation for these businesses by approximately four cents from the length third quarter.
Annette Burns: The diversification of our revenue sources remains a core strength for the company, with fee income accounting for 31% of total revenues.
Annette Burns: Our fee income business lines of Retirement Plan Administration, Wealth Management, and the Insurance Agency have demonstrated a meaningful five-year compounded annual growth rate of nearly 10 percent.
Annette Burns: Thank you.
Annette Burns: Moving on to non-interest expense, our total operating expenses were $95.7 million for the quarter.
Annette Burns: which is $6.2 million or almost 7% above the linked second quarter.
Annette Burns: 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.
Annette Burns: 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.
Annette Burns: We remain committed to managing our non-interest expenses effectively, balancing cost efficiency with the necessary investments to support our engagement with customers and our people.
Annette Burns: On slide 10, we provide an overview of key asset quality metrics.
Annette Burns: 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 than the second quarter, and the stabilization of the portfolio prepayment assumptions.
Annette Burns: 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. Non-performing assets to total assets was consistent with the past three quarters.
Annette Burns: Reserve coverage of 1.21% of total loans was consistent with the prior quarter and covered more than three times the level of non-performing loans. We believe that the expected balance sheet growth and continued mixed changes will be the drivers of future provisioning needs.
Annette Burns: In closing, we were pleased to see Net Interest Margin and Net Interest Income growth for the second consecutive quarter.
Annette Burns: 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 nine months of 2024.
Annette Burns: 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.
Annette Burns: Thank you for your continued support, and at this time, we welcome any questions you may have.
Speaker Change: Thank you. Anyone with a question at this time can press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. One moment for our questions.
Annette Burns: and John Watt. Thank you.
John Watt: Thank you.
John Watt: Thank you. Thank you. Thank you.
Speaker Change: And our first question comes from Steve Moss of Raymond James. Your line is open.
Steve Moss: Good morning.
Steve Moss: Good morning, Keith.
Steve Moss: Maybe starting with the margin here, Annette, you mentioned, you know, the
Steve Moss: the need to offset variable rate loans, just kind of curious to hear
Steve Moss: You know, how are deposit pricing trends in the early going with the 50 base point rate cut and kind of how you're thinking about it here going through a potential cycle?
Annette Burns: Sure, so maybe I could frame it this way, when we think about deposit pricing changes and our ability to affect that,
Annette Burns: We really have, about 40% of our book is price sensitive.
Annette Burns: probably the most significant being the $3.4 billion we have in money market accounts.
Annette Burns: You know, we feel like we can be pretty reactive there. We did do a little bit of downward right prior to the cut, but we think we can be pretty reactive there.
Annette Burns: And then we have our $1.4 billion in CDs that we are also pricing downward.
Annette Burns: I think, you know, the loan repricing, the $2 billion, is almost immediate, and there'll be some timing differences on the deposit pricing side.
Speaker Change: Okay, and then on the asset side, you mentioned...
Speaker Change: Cash flows from the loan portfolio will depend on the yield curve. Just kind of curious, any updated thoughts around fixed rate asset repricing?
Speaker Change: Hey!
Speaker Change: So we have about $2 billion in cash flows coming off of our loan books annually.
Speaker Change: So currently today in the current yield curve environment that we're still repricing higher and you know this quarter and the past few quarters we've seen two to three basis points a month of
Speaker Change: asset repricing. So, you know if the yield curve holds up we continue to expect to see that.
Speaker Change: more dependent on that than the front end.
Speaker Change: Right, so still roughly a, let's call it a 150 to 200 base point pickup in yield just as...
Speaker Change: as loans are repricing at the current curve.
Speaker Change: Yeah, it's, Steve, we would have to get back to you on that based on our mix, but as you know, you know, somebody other than us determines where mortgage rates are, you know, the secondary market tends to dictate that, and so if you look at where we are on sort of a line of business, you know, our new originations in most of our consumer and commercial portfolios that aren't residential mortgage are still in the high sixes, low seven percent, you know, compared to portfolio yields in the low sixes.
Speaker Change: So, for that part of the portfolio, I'm going to say a little under than your 150 basis point expectation.
Speaker Change: On the mortgage side, probably closer to $200,000. 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 a secondary sale activity.
Speaker Change: Okay, fair enough. And then just one more for me here, you know, good quarter for loan growth on the C&I side. Just curious, you know, the drivers there and how you guys are feeling about the loan pipeline.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Annette learns about business management, data sharing, investment sana is a deep learning philosophy that helps you make investment decisions within your organizations. I'll not give more information than we can have at a later date.
Speaker Change: Okay, great. Really appreciate all the color here.
Steve Moss: Appreciate the questions, Steve.
Steve Moss: Thank you.
Speaker Change: And our next question comes from Christopher O'Connell of KBW. Your line is open.
Speaker Change: Bye.
Speaker Change: Hey, how's it going? This is Angel Escher on for Chris.
Speaker Change: Good morning. Morning. So I know you had that elevated incentive accrual this quarter and noted the continued digital investments. How should we be thinking about the expense run rate going into Q4?
Speaker Change: So I think if you were to kind of look at the first nine months and average it we had probably about three cents of additional expense and incentive comp.
Speaker Change: 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, you know, probably thinking somewhere in the four to five percent, you know, run rate increase for 2025.
Speaker Change: Okay, great, thank you. And just going back to some of the...
Speaker Change: Margin Dynamics. Did you have a spot margin or spot deposit cost for September?
Speaker Change: Can you just speak to a little bit how you see the margin trending near-term over the next couple quarters? Thank you. Sure, I'll take a run at that and let Annette supplement this. Is spot rates for September and the quarterly rates not materially different?
Speaker Change: So, you know, the stabilization of overall funding costs with the help from the mixed 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, you know, we are not near-term or long-term prognosticators of that outcome.
Speaker Change: 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.
Speaker Change: So, I think it's more 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.
Speaker Change: Knowing that on a short-term basis, I think the 50 basis point adjustment on the front end that did impact our variable loans
Speaker Change: 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?
Speaker Change: Thanks for watching!
Speaker Change: Okay, great. Thank you. That was very helpful. And just last one. Sorry if I missed this, but did you provide a deposit beta assumption for the cutting cycle?
Speaker Change: We did not. Happy to talk to you or Chris about that offline. Okay, that's it. Thank you. I'll step back.
Speaker Change: and John Watt. Thank you. Thank you.
Speaker Change: And our next question comes from Matthew Brice of Stevens. Your line is open. Good morning, everybody.
Matthew Brice: Hey, good morning Matt. Annette, I hate to go back to expenses. It was just, it was just a bit higher than I was thinking. I'm just curious, you know, first of all, if it came in a bit higher than what you were thinking and then going back to your
Matthew Brice: comments on the Outlook and what was kind of unusual. The three cents kind of puts you, at least by my rough math, maybe...
Speaker Change: So is it fair to assume we get back down to that, you know, 94, high 93 type level on a quarterly basis next quarter and then grow off that?
Speaker Change: I just wanted the levels up there. Yeah, I think you have that about right. I'm thinking somewhere in the 92 to 94 range as well.
Speaker Change: And we weren't surprised by that. I think the incentive compensation accrual really related to the strength of our performance for the first nine months, so it's just really kind of catching up from that.
Speaker Change: Okay.
Speaker Change: The NIM performance was really nice too.
Speaker Change: I was curious if there was anything unusually high in there, meaning did you recapture some, you know, not a full interest or pre-pays a bit higher than expected? I just wanted to make sure that the $327 new for the quarter was something we can make a profit from here.
Speaker Change: There really wasn't anything unusual in there. I, you know, I will remind you there's somewhere around two and a half, two point seven million dollars in accretion run rate.
Speaker Change: you know, maybe a penny or 600,000 of that relates to accelerated accretion. So we could have a one or two quarters where that might not be that same level.
Speaker Change: But that was very consistent with what we've seen in the last two or three quarters. So really nothing unusual in our net interest income this quarter.
Speaker Change: Yeah, okay.
Speaker Change: 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 three biggies, right? Retirement plan, wealth, and insurance.
Speaker Change: 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.
Speaker Change: Again, I think from a non-interest income front.
Speaker Change: If you were to take the nine months and average them, and that's probably a pretty good quarterly run rate for us.
Speaker Change: with some, 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.
Speaker Change: And Matt, I'll add to that, and I think we've said this before, what we enjoy in each of those three 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, you know,
Speaker Change: 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, right? You know, January 1st and July 1st type renewal dates. On the property and casualty side of consumer lines, you know, 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, you know, from some of our compliance and tax preparation services that we provide. That's pretty grand.
Speaker Change: this edition of the
Speaker Change: Great. Okay, last one for me and you tell me if I'm making a mountain out of a molehole.
Speaker Change: 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, you know, as those two portfolios continue to run off, is it possible that we start to see a little bit more reserve decline, meaning we don't have to provision quite as much?
Speaker Change: Thank you. That's a great observation, Matt. I agree with you.
Speaker Change: Some of the reduction in our reserve coverage ratio, again, it wasn't very significant, it's about one basis point, really has a lot to do with the mixed shift change. Those portfolios have probably somewhere around a 3%.
Speaker Change: Alliance allocation to them shifting into things that are closer to 1% allocation related to the growth that the portfolios that are growing.
Speaker Change: So that does have an impact on our allocation or allowance coverage ratio, so we would continue to probably see that into 2025, you know, a few basis points, and then it'll probably level off as those become less and less material.
Speaker Change: 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, you know, probably for the last two to three to four years, you know, since, you know, the full utilization of the CECL models. And I think in, you know, 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 an other consumer coverage ratio of 350.
Speaker Change: 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.
Speaker Change: I would also point out that, you know, 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, you know, not meaningfully changing during the forecast period as well.
Speaker Change: as well as some stabilization on our prepayment assumptions, which just means that our expected life has really stabilized this quarter, which we did not see that last quarter.
Speaker Change: Very helpful. I appreciate you taking all my questions. I'll leave it there. Thank you. I appreciate it, Matt. Thank you. Thank you, Matt. I'm not showing any further questions. I will now turn the call back to Scott Kingsley for his closing remarks.
Scott Kingsley: Thank you.
Scott Kingsley: I want to thank everyone for participating in today's call and for your interest in NVT, and we will see you early in 2025. Thanks so much.
Speaker Change: Thank you, Mr. Kingsley. This concludes our program. You may disconnect. Have a nice day.
Speaker Change: Matthew Breese, Alexander Twerdahl, John Watt,
Speaker Change: Matthew Breese, Alexander Twerdahl, Stephen Moss, Scott Kingsley [inaudible]
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