NBTB - NASDAQ

Good day, everyone. Welcome to the conference call covering NBT Bancorp's Fourth Quarter and Full Year 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 listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. 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.

Thank you, Daniel. Good morning, and thank you for joining us this morning. With me in snowy Norwich today are NBT's Chief Financial Officer, Annette Burns, and Joe Stagliano, President of NBT Bank, N.A. Our operating performance for the quarter and full year 2024 continued to reflect the strength of our balance sheet, our diversified business model, and the collaboration and diligence of our team. During the fourth quarter, we productively grew loans, improved our funding profile, and boosted net interest margin for the third consecutive quarter. Incrementally lower funding costs more than offset a 5 basis points decline in earning asset yields. Non-interest income continued to be a highlight, making up 30% of total revenues for 2024 with each of our non-banking businesses achieving new record years for revenue and earnings generation. 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 first quarter. This represents our 12th consecutive year of annual dividend increases and it demonstrates our commitment to provide consistent and favorable long-term returns to our shareholders. We added $100 million to shareholders' equity in 2024 from productive earnings generation despite the higher level of dividends paid, adding to our already desirable level of capital flexibility. Activity continued to progress across Upstate New York's semiconductor chip corridor in the fourth quarter, including several announcements about new expansion and structural investments as well as certain site-specific milestones being reached at Micron's planned complex outside of Syracuse. NBT is uniquely positioned to play a significant role in providing financial services to all types of customers and prospects living and working along the Upstate New York semiconductor chip corridor. In September, we announced that NBT reached an agreement to merge with Evans Bancorp, a $2.3 billion community bank headquartered in Williamsville, New York. Our partnership with Evans is a natural geographic expansion of NBT's footprint into the western region of New York. Expanding into Buffalo and Rochester, Upstate New York's largest markets by population, complements our meaningful presence in Central New York, the Capital District, and the Hudson Valley, and it will position us as the community bank with the largest deposit market share in Upstate New York. In December, we received the required regulatory approvals to proceed with the merger as well as approval from Evans shareholders who demonstrated strong support for the partnership. We continue to work toward a second quarter 2025 closing and a concurrent core systems conversion. Our transition and integration activities with the Evans team these past four months have reaffirmed our belief that they are a customer, employee, and community-focused organization with dedicated and talented professionals. At this time, I'll turn the meeting over to Annette to review our fourth quarter results with you in detail. Annette?

Thank you, Scott, and good morning. Turning to the results overview page of our earnings presentation, for the fourth quarter, we reported net income of $36 million or $0.76 per share. Excluding merger costs and securities gains, our operating earnings per share were $0.77, a decrease of $0.03 per share compared to the prior quarter. Tangible book value per share of $23.88 as of December 31st was up $0.05 per share from the end of the third quarter, marking another all-time high for NBT. The next page shows trends in outstanding loans. Total loans were up $319 million for the year or 3.3% 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 $479 million or 6%. Our loan portfolio of $10 billion remains very well-diversified and is comprised of 53% commercial relationships and 47% consumer loans. Fourth quarter loan yields declined by 9 basis points from the third quarter of 2024 as approximately $2.1 billion of loans repriced downward with a decrease in short-term rates, partially offset by the reinvestment of earning asset cash flows into instruments with rates higher than existing portfolio yields. On Page 6, total deposits of $11.6 billion were up $578 million or 5.3% from the December 2023 timeframe. 58% of our deposit portfolios consist of no and low-cost checking and savings accounts and 42% in time and money market accounts. The company's quarterly cost of total deposits decreased 12 basis points from the third quarter to 1.60%. The next slide highlights the detailed changes in our net interest income and margin. Our net interest income in the fourth quarter of 2024 was 3.34%, which was up 7 basis points from the prior quarter, primarily due to a decrease in the cost of deposits and a more favorable funding mix, including increases in demand deposits. The fourth quarter's net interest income was $4.4 million above the linked third quarter. The primary drivers to the increase in net interest income were the decrease in the cost of interest-bearing liabilities and the $257.5 million growth in average earning assets. Our asset/liability management positioning remains fairly neutral with approximately $2.1 billion in variable rate loans repricing almost immediately with changes in short-term rates, which requires us to actively manage our funding costs downward to more than offset that impact, as evidenced by the 12 basis point decline in our deposit costs for the quarter. As a reminder, approximately $5 billion of our deposits are price-sensitive. The amount of potential positive lift in yield from the reinvestment of loan portfolio cash flows will be dependent on the shape of the yield curve. The trends in non-interest income are outlined on Page 8. Excluding securities gains and losses, our fee income was $42.2 million, an increase of 11.1% compared to the fourth quarter of 2023, but consistent with prior years was seasonally lower than the previous quarter. The diversification of our revenue sources remains a core strength for the company. 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 9%. Total operating expenses excluding merger costs were $99.8 million for the quarter, a 4.8% increase above the linked third quarter. Salaries and employee benefit costs were $61.7 million, an increase of $2.1 million from the prior quarter. This increase is primarily driven by higher health and welfare costs and an increase in other employee benefits, including higher levels of performance-based incentive compensation. Slide 10 provides an overview of key asset quality metrics. We recorded a loan loss provision expense of $2.2 million in the fourth quarter, which was $700,000 lower than the prior quarter. This decrease was primarily due to the runoff of the other consumer and residential solar portfolios, partially offset by a higher level of net charge-offs. Net charge-offs to total loans were 23 basis points in the fourth quarter of 2024 compared to 16 basis points in the prior quarter. The increase in net charge-offs during the quarter was driven by two commercial relationships totaling $2.4 million, of which $1.7 million was previously specifically reserved. Non-performing assets to total assets increased $14.4 million from the prior quarter, attributable to a commercial real estate relationship that was placed into non-accrual status in the fourth quarter of 2024. This relationship is being actively managed and its remaining carrying value is supported by the fair value of the underlying real estate. Reserve coverage was 1.16% of total loans and covered more than two times the level of non-performing loans. We believe that the expected balance sheet growth and continued changes in loan mix will be the drivers of future provisioning needs. In closing, net interest margin and net interest income trends are positive with growth for the three consecutive quarters. Our well balanced loan growth, granular deposit base, stable asset quality trends, and strong fee income generation contributed to our solid operating performance in 2024. The continued strength of our capital position has provided the flexibility to deliver 12 consecutive years of dividend increases to our shareholders, the ability to support organic growth and to capitalize on opportunities, all while effectively managing risk. Thank you for your continued support. And at this time, we welcome any questions you may have.

Thank you. [Operator Instructions] And our first question comes from Steve Moss with Raymond James. Your line is open.

Good morning.

Hey. Good morning, Steve.

Good morning, Steve.

Good morning, Scott. Good morning, Annette. Maybe just starting-off on the margin here, good margin trends. Just kind of curious, you've talked in the past about, call it, $2 billion in annual cash flows, repricing of 75 to 100 basis points. Just kind of curious if that trend remains the same or kind of where loan pricing is these days.

Steve, that's correct. I think that's spot on. We have right around $2.2 billion in loans cash flowing annually. We expect those to reprice into higher rates, and depending on the shape of the yield curve, we typically price between that two, five to seven year on the curve. And you're correct as well, if you look at our new volume rates versus our portfolio rates, for auto, we're probably 50 basis points higher; commercial, 75 basis points to 100 basis points higher and residential still about 200 basis points higher. In addition, we also have investment securities cash flows that come in right around $325 million expected for 2025.

So Steve, to follow up on Annette's comment to your question, yes, $2.1 billion of commercial relationships that are essentially SOFR based, and so they will change anytime there's a change in short-term rates and usually change within a month of the impact and the change of Fed funds rates. So that stays about the same. There is a portion of those that probably reach a natural five-year or seven-year type renewal window over the course of the next year or two, but generally, that's what comes down immediately and we probably experienced 65% to 75% of that in the fourth quarter based on the 100 basis points of change that's happened since September.

Okay. Great. And then on the expense side, expenses stepped up this quarter. I realize there's various things on the compensation side and other. Just kind of curious how you guys are thinking about the run rate for you guys on a standalone basis going forward.

Sure, Steve. I think if we were to look at the run rate of the last two quarters, you're correct, the fourth quarter had some higher levels of incentive compensation and a little bit of noise in other expenses, but if we took an average of the last two quarters run rate, that's somewhere in the $97 million to $99 million a quarter. We think that that's probably a good place to think about at least the first half of the year. Just to remember a few things that happened in the first quarter, we have higher payroll costs, higher stock-based compensation costs, a little bit higher occupancy costs around snow removal and heating and things like that. So that -- so the first quarter might pick up a little higher, closer to the $99 million. And then on average, if you took a 4% to 5% increase on our full year 2024 run rate, that's probably where we're thinking operating costs will be for 2025.

Okay. Great. Appreciate that. And just one last one from me here. Just in terms of the loan loss reserve ratio trends, just kind of curious of the drivers of the decline in the consumer portfolio. I realize that's a runoff, but I guess it was a bit more of a step-off than I was thinking would happen here. And also it looks like some of the decline in the CRE was related to that charge-off on non-performing. Just curious, do you build back the reserve on commercial real estate over time?

You are correct. The decrease in the coverage ratio related to CRE is directly related to the release of that specific reserve as we charge that portion of the loan down. So I think that if you were to look at that ex that, it's pretty consistent with where we were. So we feel like we're adequately reserved in our CRE portfolio. I wouldn't expect that to change materially from where we are at the fourth quarter unless we see changes in our forecasts or something to that effect. So overall, the reserve mix is changing. If you think about our solar and LendingClub portfolio, runs off maybe about $35 million a quarter and they have an allowance allocation of about 3.5%. So then as we build and grow new loans in our other books, the kind of the average coverage ratio for those loans is about 90 basis points. So that is having an impact on the amount of provisioning needs we need just due to that change in mix.

Yeah. Even as a follow-up to Annette's comment, Steve, if you're running off $30 million to $35 million of solar and specialty consumer and you're adding all of the other things that we're holistically trying to grow the balance sheet with, you can probably have a, quote, net neutral outcome in your provisioning and you could have $100 million to $125 million of growth in everything else just because of the net differential and the mix. And that's something we've been experiencing in 2024 essentially for every quarter, but knowing full well that the CECL modeling makes you reserve for stuff in a period of growth, a period of growth that we had in the first half of the year had a higher provision complement associated with that.

Okay. Great. I appreciate all the color there and I'll step back. Thank you very much.

Thank you, Steve.

Thanks, Chris.

Thank you. Our next question comes from Manuel Navas with D.A. Davidson. Your line is open.

Hey, good morning.

Good morning.

Can we talk a little bit about expected kind of legacy loan growth right now? Is kind of the optimism with the change of administration showing up in increased growth or is that more to ramp across the year and you're staying within the -- your past mid-single digit guidelines for loan growth with some runoff?

So Manuel, I would start with saying that we haven't noticed any substantive change in our markets. Our markets had a very good 2024 and I think the optimism in the markets has probably, quote, stayed the same. Whether that's in Southern Maine across Southern New Hampshire, into Vermont, into all parts of Upstate New York, there's a general sense of optimism in most of our markets that either comes from planned investments that we see coming much like the semiconductor manufacturing opportunities across Upstate New York as well as just the stability that exists in our core markets. So for us, when we talk about, and Annette made the comment that essentially last year we grew loans 6%, less the portfolios that we had in a planned runoff status, I think those types of factors and variables kind of think -- they're how we're framing the first half of 2025 as well. I think when you look at the extension into Western New York for us, I think we, again, feel very bullish that there is growth opportunities for us in the market from a participation standpoint. So we don't think that there is a market today that we're in that doesn't feel investable, nor does it feel like activity has either stopped or is a little bit stale. Our portfolio pipelines are as good as they were at the beginning of the year last year. And the beauty for us is they seem to be spread generally across almost all of our markets. We've made this point a couple of different times. We, like a lot of people, are motivated to think about how to capture holistic relationships, whether that's on the commercial side or on the retail side. And with that, one-off transactional things are not probably as attractive for us as the ability to bank the customer on both sides of their balance sheet.

That's great. Early in your comments, you brought up kind of big picture, some of the announcements around the chip corridor, new expansion, structural investments. It all understood big picture. What are things that are like happening right now that you're excited about? Anything -- I know a lot of it still has a long tail into the future, but what are some of the markers that you're seeing more recently that have you excited that everything is progressing as expected for this huge opportunity within the chips corridor?

Sure. So specific to the to the Micron opportunity, it's that they've worked through all of the documentation and the agreements with the federal government or, in certain cases, with the State of New York relative to support for the growth activities. That not only applies to Micron, but applies to the New York Creates organization in Albany, essentially the Nanotech research facility in Albany. There's been some announcements at GlobalFoundries in the Capital District or Saratoga marketplace, as well as GlobalFoundries in -- outside of Burlington, Vermont. So I think the path stays very robust and consistent relative to that from a growth standpoint, understanding that there is a lot of capital expenditures that goes into whether it's chip fabrication, research and development or tool construction. So getting one's arms around that that is a long-term play is really important. That -- you're probably not going to talk about something starting at the beginning of a quarter and being done at the end of a quarter. It's a much longer timeframe for that. But the support activities that exist around those opportunities also were in play. There is a whole bunch of structural investments both from a highway standpoint and other things in Upstate New York that are underway as we speak. We're really bullish on what's happened 14 or 16 months later after our Salisbury acquisition in the lower Hudson Valley and in parts of northern Connecticut. One of our pipelines that's the most prolific right now is in Connecticut. So we've had really good opportunities all the way from West Hartford back to the New York border and really look forward to building those things out.

That's good color. Can I just tack on one thing on the NIM? Deposit costs have come down a bit. Is there more room to go or is it harder to keep cutting costs? And just how has that come together with some of the loan yield commentary before for near-term NIM?

There is more room to go. We talked about the $5 billion and assets that we think are -- have the ability to reprice since the remaining $7 billion is low in deposit costs already. So if you break out that $5 billion, you've got right around $3.4 billion of money market accounts. We think we can react fairly quickly to changes in rates. We think that probably not all of the December rate cut was in the fourth quarter. So we'll see a little bit of that benefit into the first quarter even without any rate changes. And then the remaining $1.4 billion in CDs will be a little kind of lag, right, because of the timing of maturities, but we'll see that leg in as well. So I think there's still some opportunity in those books to continue to reprice downward.

And this all has you headed into Evans close with a stronger NIM. And any update on kind of combined financial metrics? And I'll step back into the queue after this.

So like Scott said, we're going to take some time once Evans releases their full-year results and refresh our marks. So we'll have a better feel for that in the first -- into the first quarter.

But I think your comment, if you think about this four or five months ago is, do we feel like our net interest income opportunities and net interest margins on a legacy basis are improved from what they probably looked like early or late in the third quarter? We do. Do we presume that that construct will probably be consistent with Evans? We do. And so to your point, feel as good, if not a little bit better than when we announced the transaction.

Looking forward to future updates. Thank you very much.

Thanks for the questions.

Thank you. [Operator Instructions] Our next question comes from Matthew Breese with Stephens. Your line is open.

Hey, good morning.

Good morning, Matt.

Hi, Matt.

A lot of my questions have been answered. Maybe just a -- quick two or three. I guess the first one is, with Evans going to be behind you, what is the timeframe before you start thinking about additional M&A opportunities on the whole bank side? And then geography wise, what parts of the map do you make the most sense?

Well, Matt, appreciate that in terms of a question. So we are a mono line focused on Evans that -- since it's not planned to close until the second quarter, that's all we're thinking about. And again, as we've said before, the incremental opportunities that we think will present themselves to us in western New York are really worth capitalizing on. So we really want to get that right. So I won't say that we have a timeline in our head relative to evaluating other opportunities on a straight M&A standpoint, but we truly want to get through a period of time where we know that we've done everything and applied all of our resources to making sure that Evans goes right for the Evans employees and for the Evans customer base. So that is paramount and number one. Have we had people continue to reach out to us now that we've been in -- have finished an acquisition and have announced another one and plan to close one? Absolutely. I would kind of take the franchise and look at it this way, Matt, that are there places where now, with our larger span from a geographic standpoint that we have opportunities to build out within the structure of our current franchise? We do. So as an example, we have a branch coming online in South Burlington in March. Is there additional opportunities for us to continue to build out the Vermont franchise working south and a little bit further into the state? Today, our markets are really covering Chittenden County. We think there's still opportunities to enhance our concentration in Southern Maine and Southern New Hampshire where, again, we have great representation, but we think our concentration could improve over time. I think Joe has made this comment a couple of different times that we're probably going to commit to something in the Syracuse marketplace closer to the Micron installation and maybe something else generally there. Can we extend our franchise north of Syracuse into Jefferson, Lewis County where we're not represented today? That still creates an opportunity. We're spending time in the markets in the upper and lower Hudson Valley where we really think that connecting some of the stuff that we got in the Salisbury acquisition to our legacy markets is appropriate and opportunistic. So -- and if I went to just add one more, how do we extend a little further into the Poconos in northeast Pennsylvania and potentially into the Lehigh Valley? Whether we need to do that via M&A or can do that organically, I think it's both. And I think that opportunity will present itself over the next one, two, three years in multiple different places. So we're really excited about filling in the franchise now that we've had the opportunity over the last two or two and a half years to really extend into markets we want to participate in.

Excellent. Next one from me was, Annette, what's a good tax rate for next year? It's been bouncing between 20% and 22%. Is that still the right range? I've been using kind of 22.5% to 23%.

So I think 22.5% to 23% is a good estimate for next year's tax rate.

Okay. All right. And then, Scott, maybe just going back to that last comment, the excitement is there, and from a macro standpoint, you certainly have a lot of wind at your back from a number of different fronts. I was hoping maybe you could, one, outside of some of these organic growth opportunities, where are you spending the most time, investments internally, product, services, new hires? And maybe could you paint a picture for us either in terms of potential profitability outcomes or EPS over the next handful of years as all of this kind of comes to fruition? And it certainly feels like the wind is at your back. Thank you.

Thanks for the question, Matt. That's a deep one. You're dipping into meaning of life on that. So thank you. But to your point, we like where the opportunities are in the markets from a standpoint of just sheer market activity and market growth opportunities. So that is something that is important to us. And that's why it supports our ability to say we think all of our markets are investable. All of our lines of business are investable. I think today we're -- we tend to be focused on how do we improve the experience for the customer, for our employee at the same time. So we're working on how do we grow the institution and how do we improve our processes at the same time. At our size, we also have our eye on the buildout of enterprise risk management as a holistic outcome for the company. The expectations are clearly there from a regulatory standpoint that we will continue to progress on that. We think we've made great strides on that over the last handful of years, but we know that the bar just moves up on that in terms of that expectation. But in fairness, it's not even a bad expectation. It's actually the right things for us to do. Having more evolved stress testing in our portfolios is a positive thing. We learn more about our customer, we learn more about ourselves, and we think about that relative to how do we prioritize where we want to make some of those investments go forward. Would we like to accomplish some of those things with just improvements in systems, but do we need really bright people to help us get to that point? We absolutely do. So I think we are very pleased with where we're positioned today. We like the trend line and the momentum that comes out of our last two quarters. It clearly feels better to go to market as a company when your margin is in the mid-3.30s than it did when it was in the low 3% level. That gives you an opportunity from a revenue generation to consider some of these investments on the expense front or the capital front that you do want to make in improving your organization. So we think, quite frankly, it's tactical management and we probably think we've got as much flexibility in that tactical management today as we've had over the past eight quarters.

Understood. And just to slide another one in there, you had said it feels better to go to the market. Is there any sort of capital suggestion between the lines there, especially with some of the subs that come due later this year? That's all I had.

That's a great question. Pretty granular, and happy to take that up with you a little bit offline, but at the same point in time, yes, we have a sub-debt issuance that Annette worked diligently on from her house in 2020 during the pandemic that gets to remark capacity in mid-year. Should we replace that with another instrument in the capital stack or should we just pay it off, which we have the flexibility to do because we've been building cash reserves at the holding company to accomplish that, but we'd like to think about if there was opportunistic spots that we could replace that with, we'd be really interested in thinking about that. And we spend time talking about that.

Great. I'll leave it there. Thank you for taking my questions.

Sounds good. Thank you.

Thank you. And our next question comes from Steve Moss with Raymond James. Your line is open.

Just one more follow-up here that -- a lot got answered right there, but in terms of -- just want to circle back on the commercial real estate non-performer that went to non-performing status this quarter. Just kind of curious about the type of loan it is and kind of how you're thinking about the resolution here. I'm assuming it was the $700,000 charge-off.

Yeah. So Steve, it's a new multifamily housing project in one of our better markets in Upstate New York, and it's just been very slow to lease up. Whether the developer or the sponsor is modestly priced differently than the market will accept today, it's a great question, but there's really not much more to it than that. But it's in a marketplace where historically the assets have performed very well, and we think over time, this one will as well.

Okay. And was this participation?

We do have a partner in this one.

Okay. Great. Appreciate all the color there. Thanks.

Thanks.

Sure. So Chris, while we see if we've got some of that detailed information in front of you, I would say this. The $90 million to $100 million of decline that we experienced in solar residential in 2024 is likely to be a proxy for what we would expect going forward. You remember that the instruments in solar residential, because they are essentially a home improvement, tend to have a longer duration or longer contractual maturities than the standard consumer financing, maybe even financing consistent with auto lending. So I would use that as a proxy for that. I'm going to guess this, and Annette's probably going to tell me differently, but that our consumer loan portfolio that is not the Springstone, LendingClub is in the ballpark of $50 million to $60 million today.

Thanks, Chris.

Thank you. And our next question comes from Manuel Navas with D.A. Davidson. Your line is open.

Hey. Just wanted to hop back on to ask about the legacy fee growth in the mid-single digits. That doesn't include any potential cross-sell in Evans. And has that kind of been explored further? Is there any way we could size it yet or is that more something to consider for '26? And then my other question on fees is, how does M&A look on the fee side?

So two good questions. So one, what I would say is our people that deliver solutions in wealth management and insurance are really excited about the extension into the marketplace in western New York. Do we think that that opportunity will be able to be capitalized on early after the close? We do. What that will mean in terms of the materiality to those growth -- to the business growth in 2025, probably not material. But really bullish on what that might look like going forward because those solutions today are offered at Evans, but in a very modest way today. Great question on the M&A side for the fee-based businesses. We are always looking to find partners in our footprint on the wealth management and the insurance side that will allow us to create some positive operating leverage in thinking about buying books of business. Those are things that are almost episodic. The ability to evaluate those on an ongoing basis is more of a networking function, meeting people that also do that either on an independent basis or that you've had some other relationship with. A little bit different in retirement plan administration because that's a national business for us, the scope of things we get asked to potentially think about. But I would say the same thing that how do we find or how do we source potential additions, it's the networking of our current business leaders that creates most of those opportunities. And remembering it's unusual for us to acquire an enterprise in any of those lines of business that has north of $5 million in revenue. Our sweet spot tends to be between $1 million and $5 million, and we're really good at integrating those into each of those -- in each of our businesses. So always happy to look at those and always thinking about that as an opportunity, but more within the confines of the footprint we currently have.

That's great. I appreciate the commentary. Thank you very much.

Thanks very much.

Thank you. I'm not showing any further questions at this time. I will now turn the call back to Scott Kingsley for closing remarks.

Daniel, thank you. In closing, I want to thank everyone for participating on the call with us today and your interest in NBT. And we look forward to talking to you again in the early spring. Have a great day.