Q2 2024 NBT Bancorp Inc Earnings Call

Participants

Scott Kingsley; President, Chief Executive Officer; NBT Bancorp Inc

Annette Burns; Chief Financial Officer; NBT Bancorp Inc

Joseph Stagliano; President of NBT Bank, N.A; NBT Bancorp Inc

Matthew Breese; Analyst; Stephens Inc.

Christopher O'Connell; Analyst; Keefe, Bruyette & Woods, Inc.

Presentation

Operator

Good day, everyone. Welcome to the conference call covering NBT Bancorp's second-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.
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. As a reminder, this call is being recorded.
I would now turn the conference over to NBT Bancorp President and CEO, Scott Kingsley, for his opening remarks. Mr. Kingsley, please begin.

Scott Kingsley

Thank you, Michelle. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's second-quarter 2024 results. With me today are NBT's Chief Financial Officer, Annette Burns; Joe Stagliano, the President of NBT Bank, N.A.; and Joe Ondesko, our Treasurer.
This is our first earnings call following our leadership transition in May, and we want to extend our thanks to John Watt and the entire NBT Board of Directors as well as the management team for supporting us through a very smooth transition. I would also like to congratulate Rick Cantele on his upcoming retirement from our senior management team in August. Rick's insight and contributions following the completion of the Salisbury merger have been invaluable. He will continue to provide important guidance as a member of our Board.
We are pleased to now review our second-quarter results with you today. Our operating performance for the first quarter and the first half of -- or the second quarter and the first half of 2024 continues to reflect the strength of our balance sheet, our diversified business model, and the collaboration of our team. During the second quarter, we productively grew loans across our footprint and improved our net interest margin as earning asset yields increased incrementally higher than funding costs. A positive result, but we're still cautious on pronouncing it as a trend.
Noninterest income continued to be a highlight, making up 31% of total revenues for the second quarter and reaching a new quarterly all-time high. We are also pleased to announce a 6.3% increase in our quarterly cash dividend to shareholders. 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 26% improvement over the past three years.
In April, it was announced that the US Department of Commerce has entered into an agreement with Micron Technology to provide a $6.1 billion grant under the CHIPS and Science Act 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. Additional support for the Clay complex includes a $5.5 billion tax credit from the New York State Green Chips program and significant infrastructure investments by the state and Onondaga County. Site-specific progress continues as planned. 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'll turn the meeting over to Annette to review our second-quarter results with you in detail. Annette?

Annette Burns

Thank you, Scott, and good morning, everyone. Turning to the results overview page of our earnings presentation, for the second quarter, we reported net income of $32.7 million or $0.69 per share. Our net interest margin in the second quarter of 2024 was 3.18%, which was up 4 basis points from the prior quarter as our 8 basis points of earning asset yield improvement more than offset our increase in funding costs in the quarter. Tangible book value per share of $22.54 as of June 30 was up $0.47 per share from the end of the first quarter and was at an all-time high for NBT.
The next page shows trends in outstanding loans. Total loans were up $204 million for the year or 4.2% annualized and included growth in our commercial and indirect auto portfolios. Excluding the other consumer and residential solar portfolios that are in a planned contractual runoff status, loans increased $295 million or 6.9% annualized.
Second-quarter loan yields were up 9 basis points from the first quarter of 2024, reflective of continued higher new origination [at rates]. Our loan portfolio of $9.85 billion remains very well diversified and is comprised of 53% commercial relationships and 47% consumer loans.
On page 6, total deposits of $11.27 billion were up $302.5 million from December 2023. We saw growth in consumer balances and accounts along 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 continues to experience some remixing from its no interest and low interest checking and savings accounts into higher yielding money market and time deposit instruments. Our quarterly cost of total deposits increased 7 basis points from the prior quarter to 1.68%.
The next slide looks at the detailed changes in our net interest income and margin. The second-quarter net interest income was $2 million above the linked first-quarter results. The primary drivers to the increase in net interest income was an increase in asset yields and loan growth, partially offset by an increase in interest-bearing deposit costs. We saw stabilization in net interest margin during the quarter. And although we continue to see an increase in our funding costs, the pace of the increase continued to slow during the quarter.
The trends in noninterest income are outlined on page 8. Excluding securities losses, our fee income reached $43.3 million, which is an increase of 18% from the second quarter of 2023 and was consistent with the previous quarter. This marks a record high of quarterly noninterest income, driven by new account growth and favorable market performance in our retirement plan administration and wealth management businesses.
Retirement plan administration revenues increased by $500,000 from the first quarter due to organic growth, positive market conditions, and higher activity based fees. Our wealth management services also increased by $500,000 in the second quarter due to favorable market performance and new account growth. Insurance Agency revenues were lower due to the seasonally high revenues recorded in the first quarter.
The diversification of our revenue sources remains a core strength for the company, accounting for 31% of total revenues. Our fee income business lines of retirement plan administration, wealth management, and the insurance agency has demonstrated a meaningful compounded annual growth rate of 9.3% over a five-year period.
Moving on to noninterest expense, our total operating expenses were $89.6 million for the quarter, which is $2.2 million or 2.4% below the linked first quarter. Salaries and employee benefit costs were $55.4 million and decreased $311,000 from the prior quarter. This decrease was primarily due to seasonal higher payroll taxes and stock-based compensation expense in the first quarter, partly offset by a full quarter of merit pay increases and higher medical costs in the second quarter.
Technology and data service expenses decreased $500,000 from the first quarter of 2024 due to cost savings achieved from various efficiency initiatives. Occupancy costs also decreased due to seasonal factors, including lower utility costs. We remain committed to managing our noninterest expenses effectively, balancing cost efficiencies with 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 $8.9 million in the second quarter, which was up $3.3 million higher than the first quarter of 2024. This increase was primarily due to provisioning for the second quarter's loan growth, change in prepayment speeds, which continued to extend the effective life of loans, and $1.7 million in specific reserves related to a commercial relationship previously placed on nonaccrual in the fourth quarter of 2023.
Net charge-offs to total loans were 15 basis points in the second quarter of 2024 compared to 19 basis points in the prior quarter. Nonperforming assets to total assets were unchanged for the past three quarter ends at 28 basis points.
Reserve coverage of 1.22% of total loans was 3 basis points higher than the prior quarter and covered 316% of nonperforming loans. We believe that charge-off activity will continue to trend towards more historical norms, and expected balance sheet growth and continued mix changes will likely be the driver of future provisioning needs.
In closing, our well-balanced organic growth, granular deposit base, stable credit quality, strong fee income generation, and active expense management continue to help offset a portion of the net interest income challenges experienced over the past several quarters. We were pleased to see net interest margin stabilization and net interest income growth for the quarter. The continued strength of our capital position has allowed us the flexibility to provide a $0.02 per quarter increase in the dividend to our shareholders, the ability to support organic growth, and to capitalize on emerging opportunities while effectively managing risks.
Thank you for your continued support. And at this time, we welcome any questions you may have.

Question and Answer Session

Operator

(Operator Instructions) Steve Moss, Raymond James.

Hey, good morning. This is Henry filling in for Steve Moss. Hey, thanks. So I'll start on the loan side. I was wondering if you could talk maybe a little bit about your expectations on the current pace of CRE and C&I loan growths and if we should expect a similar pace to continue through 2024.

Scott Kingsley

Henry, I'll start and take that one. We had a very strong second quarter, both on the C&I and on the CRE side. Some of the C&I growth came from line utilization, which obviously has been stubbornly low for the past three or four years. So we had some nice movement there.
A lot of that tends to be seasonal where projects for their construction or improvement projects are underway. And just given the climate that most of our markets are in, those tend to be stronger in the mid two quarters of the year.
I think in terms of opportunities that we're seeing in the market, the markets are very stable and growing. And for us, it's selecting those opportunities that we feel we can best capitalize on.
We have a bias towards supporting our existing customer base from a development activity standpoint. But I think that second-quarter results were probably a little bit above even our expectations in terms of new loan growth. We'd probably expect them to tick down a little bit for the balance of the year, but very happy with where we stand at the midyear point of the year.

Okay, great. Thanks. And then I guess just looking to the provision expense, it looks like it ticked up a little bit in the quarter for portfolio extension and loan growth but also for a specific reserve relationship. Could you maybe give us some color on the breakdown of this quarter's provision expense? Specifically, how much was for that portfolio extension and then how much was for that specific credit?

Annette Burns

So the specific reserve was $1.7 million of that growth in provision expense. And then I think you could probably say the rest of the increase related fairly evenly between supporting loan growth and the extension of payments -- extension of the effective life.

Scott Kingsley

And of course, covering loan charge-offs for the quarter.

Annette Burns

Yeah.

Okay, great. Thanks. And then just a follow up on that. When would you say you expect that specific reserve relationship to be fully resolved?

Scott Kingsley

I would say it's a great question. I think we're being cautiously optimistic that there are improvement plans in place for that credit. But at this point in time, it's very difficult for us to handicap if that happens in 2024 or into the future.

Okay, thanks. And then my last question, I guess just moving to the margin, I was curious if you could touch on your thoughts around the NIM, more specifically the NIM outlook and where you see that going throughout the rest of the year.

Annette Burns

So I think we are pleased to see some stabilization in this quarter. Depends on interest rate environments. I think we believe that deposit costs have stabilized. We'll probably see a few basis points -- months to continue. As long as these rates stay higher, we're ready to move on rates when there is a decrease in the short-term rates.
I think our asset repricing, pleased to see that, and we continue to see that to continue. I just think there's a lot of variables. So I think stabilization is the word for us and hoping to see further improvement as we go forward.

Okay, great. Thanks for taking my questions. I'll step back.

Scott Kingsley

Thanks, Henry.

Operator

Matthew Breese, Stephens Inc.

Matthew Breese

Hey, good morning. I was hoping to dive into some of the NIM dynamics just a little bit deeper. Maybe to start, could you provide the percentage of pure floating rate loans on the books, meaning priced off prime or SOFR or shortening on the curve? And what is the blended yields on those today?

Annette Burns

Sure. Our pure floating rate, which is primarily commercial and a little bit of home equity, is about $2.2 billion. Adjustable is another probably [1.8]. The portion that is fixed to floating, that's right around a 7.4% yield today.

Matthew Breese

Okay. And what does that imply for the remainder of the book? The fixed rate portion of the book, what does that imply for yields on that? Is it somewhere in kind of the low to mid 5s? Is that accurate?

Scott Kingsley

Yeah, and I would say, Matt, because of the fact that we portfolio so much of first lien residential mortgage, it might be the high 4s. But we would have to blend that for you to get to whether that's high 4s or low 5s. But it can't be much different than that.
I think the point on the -- your point is well taken on the pure variable. Again, most of that for us is commercial. And obviously, most of that has adjusted to the market rate here over the last 18 months to 2 years. And that's the piece that we thought when the -- if the Fed starts to change rates, which we think we would then be more confident going into our deposit portfolio in lowering certain rates, that's the piece that just comes generally right off that. So whether it's tied to SOFR or prime, those happen within a month of the Fed decision.
We also find ourselves in what I would say is in a very, very interest rate-neutral position today. So regardless of whether it's a fast movement down or a very modest movement down, probably what we expect, that we're so interest rate neutral, that there's not a huge uptick or a huge downtick, just depending on the timing of rate change.

Matthew Breese

Maybe to better understand that last point, Scott, I mean, if I think about it, you have quite a bit of fixed-rate loans in -- to your point, the high 4s, low 5s. I would assume that new loan yields in those portfolios are in the mid to high 6s, maybe even low 7s. It's a quite a bit of loan yield expansion opportunity on your fixed rate portfolio. Why not a more optimistic outlook on the NIM? It feels like the reset NIM or the normalized NIM is higher than where it is today in the second quarter.

Scott Kingsley

Yeah. So it's a point well taken. And I think that comes from the fact that we're still finding that the customer generally -- both using tools that we give them and just their own acumen is just finding ways to be more efficient with where they place their excess funding. So that's where most -- we aren't raising rates on any of our products. Obviously, we probably haven't in a year. But generally, the customer is finding a more efficient outcome for their net liquidity.
And we don't discourage that. We're trying to be in the balance retention world and trying to do all the right things for the customer. So we just think that that process still has a little bit more legs attached to it that people are still generally finding ways to be more efficient with their liquidity.

Matthew Breese

Okay. And then part and parcel with this, I thought it was interesting with the reserves that there was a duration change dynamic. Maybe give us some sense for what the duration of the loan portfolio was relative to expectations and what the reset was and how that is -- we're hearing it's a lot of fixed rate loans, are just not repricing as fast as folks thought. Can you give us some color there?

Scott Kingsley

Sure. I'll take a little bit of that and then ask Annette for any sets of details for that. But holistically, duration extension has been going on since the Fed started raising rates. I think what's most pronounced for us is given the fact that we have a meaningful portion of fixed rate commercial loans and fixed rate residential mortgages on the books today. And there's really no motivation for that customer base to pay off quickly. When you start to get into a blended multi-quarter trend from that, you still find yourself replacing a higher prepayment quarter with a lower prepayment quarter when you start to move out over time.
So I think this was just our way of saying, listen, we're trying to get our arms around the continued volatility in prepayment speeds or duration expectations. And we made the decision to make some changes on that this quarter. Just thought it was a prudent time to do it.

Matthew Breese

Okay.

Annette Burns

I would say -- I would just add to that, that we feel like we're in kind of the ending phase of that expansion and that things will stabilize after this.

Matthew Breese

All right. And I know I've been a bit long-winded; just one more. Obviously, there are some puts and takes to loan growth in your portfolio. There are some portfolios and one-off, others you're growing.
But then to your earlier point on chip investments, when do you expect -- what's going on in Clay, New York, in the capital region, and Malta, there's just a ton of money coming into the area investments for the semiconductor chip plants. When do you expect that all to have kind of a meaningful impact or influence on balance sheet growth and fee income and deposits and all of that?

Joseph Stagliano

Hey, Matt, this is Joe Stagliano. I'll jump in on that one. So a great question. So as it stands today, it looks like the plan is to begin construction in the first quarter of 2025 up in Clay. That's when they expect to start moving dirt and beginning the construction.
Construction is going to take about two years to complete. So during that time, we expect construction jobs to start up. They're projecting about 5,000 construction jobs associated with the Micron chip plant in Clay. With that, that's going to take about two years before fabrication begins. We expect the first chip to come off the production line around 2028. So with that, they're going to be hiring additional workers, about 9,000 workers directly associated with Micron in the plant, and then about 40,000 indirect jobs over the next 15 to 20 years as they complete their buildout along their plants.
So our teams are staying really close to the folks at Micron and the officials across the different government agencies. And they've established some really strong relationships along the way to get some insight in terms of what's happening.
So like what's happening up that GlobalFoundries in Malta, a lot of really good activity. Some of our strongest loan growth is happening up in the Capital Region up through the North Country. We're seeing that in our branches with some extra transaction activity and some good deposit growth. We expect that to begin and set some really good pace over the next couple of years up in Clay at the Micron site.
So a lot of activity going on right now. It's a lot of work leading up to the construction. And we expect to see what we see up in Albany, up in Saratoga, around the Malta area to continue at the Micron site and Clay.

Scott Kingsley

Yeah. And Matt, I would add to that that you know our desire is to stay a leader in this relative to making sure that our customers are engaged with the opportunities across all of our markets so that we've enhanced our own education of the opportunity and what that looks like. We're completely engaged with economic development agencies across the Chip Corridor, again, to try to promote just a better understanding and being able to capitalize on these opportunities.
I happen to believe that a demographic change like this is just not usual for upstate New York. So this opportunity probably rises all boats. But I think we just want to be out in front of that and make sure that our customer base for our future customer base is very well informed. So it continues to be our objective.

Matthew Breese

Great. I appreciate all that. I'll step back. Thank you.

Scott Kingsley

Thanks, Matt.

Annette Burns

Thank you, Matt.

Operator

(Operator Instructions) Christopher O'Connell, KBW.

Christopher O'Connell

Hey, good morning.

Scott Kingsley

Hey, good morning, Chris.

Christopher O'Connell

So just wanted to circle back to the margin dynamics here. The CD cost did not move on a quarter-over-quarter basis. And I was just wondering where new CDs are being priced at and how much of the CD book has to reprice in the second half of '24.

Scott Kingsley

So I'll start with the front end and have Annette be thinking about the amount of repricing. But in terms of new CDs, we have lowered new CD rates, but modestly. So probably something in the low 4s, high 3s is where they are based on some kind of at a tiered outcome, Chris. And so we will probably see upon renewals some results that are net positive along that line.

Annette Burns

Yes. And I think at the back half of the year, we're probably seeing maybe another $700 million repriced.

Christopher O'Connell

Great. So I mean, the costs, they are net neutral plus or minus basically from here.

Annette Burns

There is opportunity to reprice down on that piece maturing.

Christopher O'Connell

Yeah. And then on the expense side, a really good quarter. A part of it seasonal, but seemed to be pretty solid on a core basis as well. I think last quarter, you're talking about kind of stepping up or kind of flattish for the first quarter in the $91 million to $92 million range. On a quarterly basis for the back half of the year, do you still think it steps up there? Or is this run rate off of the better Q2 results able to hold?

Annette Burns

We do think I'll step up. A reminder that we have one additional payroll day in each of the quarters. So that alone will increase that expense run rate by about a penny. So there's a little bit of that. And probably just more activity in our markets and things like that will probably have some of the costs drift a little upward.

Scott Kingsley

And, Chris, our organization has been very embracing of the whole idea that as there are net interest income challenges and challenges to improve that generation, we needed to be very disciplined and pointed in our decisioning on the operating expense side. So I'd like to think we have found a great balance on that. And if the opportunity presents itself going forward for us to make some more structural investments in the second half of the year, we'll go ahead and do that, but again, at a tempered pace.

Christopher O'Connell

Great. And then on the fee side, I mean, really good year so far across the businesses. I know you're market driven, but a lot of organic growth as well. Any seasonal factors to be aware of or just overall fluctuations that you see might occur in the back half of the year for those businesses?

Annette Burns

Yeah, it has been a really good first half of the year. I would say that retirement plan administration typically, their first half is better than their second half. And that's just really there is a little bit of seasonal activity around actuarial services and various things like that.
So wouldn't expect the back half to be as strong for retirement plan services. Reminder that market performance has really been a nice tailwind for us. So if that continues, I think wealth management and retirement plan services will still see good quarters. And there's just a little bit of seasonality in insurance, but not just a couple of hundred thousand in the third quarter.

Christopher O'Connell

And maybe you could just kind of talk about backing out some of the market impacts. What's been the recent organic growth pace of the insurance retirement and wealth businesses?

Scott Kingsley

I'll touch on that really quick, Chris, and come back to Annette for. I think in Annette's script, we've looked at and said our compounded annual growth rate in those businesses over the last five years has been a little over 9%. Part of that, probably, a third of that has been generated from some opportunistic acquisitions that we've been able to do mostly in the retirement plan space and the insurance side.
So I think that that pattern makes some sense -- so whether you've got mid single digit growth maybe in the 5% to 7% range in those businesses with some market support. But generally speaking, when we look at those businesses, we look at the difference between new -- new plan growth on the retirement plan side versus lost business. Because remember, businesses are acquired, people and their plans for various reasons. I think if we can get to a point where our new growth is in the 7%, 8%, 9% side in our lost businesses in the 2% to 4%, that's a pattern we really like and we think can be replicated.

Christopher O'Connell

Great. And then lastly for me, just -- you talk about any change in the M&A environment or discussions there and if -- what you guys would be looking to do if you did participate in M&A.

Scott Kingsley

Yeah. So I think you've -- you know our history relative to capital allocation, which is we want to build to support organic growth because that's what we're good at. And we think that that is very desirable on a long-term basis for us.
As we did this quarter, we are very supportive of making sure that the dividend to our shareholders has the -- that we have the capacity and our capital to improve that every year. And that's a stated objective of ours. The shareholders need to participate in the good fortune of the company.
I think from there, we really like where we're sitting from a capital position standpoint, enabled to be able to support, being able to analyze potential M&A transactions. We're now an experienced -- an acquirer again after the Salisbury transaction last year.
And what did we learn from that? That on a crossover basis, all of the dilution that came from the transaction itself, we've more than earned back in under a year. So I think our confidence relative to getting through the complications of interest rate marks and credit marks and fair value assumptions is at a pretty high level.
I think we've talked about before natural geographic extension of our footprint. We like where we are represented across seven states, but we have some spots we would love to fill in, whether that's going a little further south in Pennsylvania, filling in some gaps we have in New England, potentially Western New York. We think we're just well positioned to be able to consider opportunities in all of those geographies, with again saying we're unlikely to be a meaningful participant in Greater New York City, Boston or Philadelphia. We just don't know how to differentiate our model in those markets and there's plenty of people that are trying.

Christopher O'Connell

And has the general discussions or M&A chatter, has that picked up at all year to date or is it still fairly tepid?

Scott Kingsley

Now we're finding an opportunity to speak to a lot of people. Again, I think it's because we completed the transaction last year, people are just interested in the dynamics that went into the decisioning of Salisbury to partner with NBT. Quote, how did the math work? What was the approval process from a regulatory standpoint? So I think people are interested in that and interested in hearing about our own experience.
So not difficult to find an opportunity. And again, remember, we are not the aggressive acquirer. We try to have a discussion with people that says, if someday, independents is not what you're thinking about, here's the value proposition of NBT.

Christopher O'Connell

Great. And is the higher organic growth pace or I guess anticipated organic growth pace over the next few years, given the demographic trends in your markets, I mean, does that change what you would want to look at in terms of a target? Meaning are you going to even consider anything that has close to 100% loan to deposit ratio? Are you really going to be looking more for lower loan to deposit ratio, funding vehicles to help enhance your own organic growth going forward?

Scott Kingsley

Yeah, I think it's a reasonable question. In other words, if we had to start to think about us as a mid to upper single-digit organic growth opportunity over time, how we would support that from a funding standpoint is critically important. But I think we would be willing to take on that challenge, both organically and transactionally if that was necessary.
Your question around does that change what we think about -- we're, again, looking for high-quality franchises, people we've had long-term understanding and relationships with that are probably geographically connected to where we're already doing today. So I don't think it radically changes that. We don't bump into very many people that have loan to deposit ratios north of 100%. It's just not indicative of the markets that we are in or most of the targets that we come across.

Christopher O'Connell

Great. Thanks for taking my questions.

Scott Kingsley

Thanks, Chris.

Operator

Thank you. 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. In closing, want to thank everyone for your participation on today's call and for your interest in NBT. And we'll talk to you in three months. Thank you.

Operator

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