Nbt Bancorp Inc Q3 FY2025 Earnings Call

Good day, everyone. Welcome to the conference call covering NBT Bancorp's Third Quarter 2025 Financial Results. This call is being recorded and has been made accessible to the public in accordance with SEC 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 will now turn the conference over to the NBT Bancorp President and CEO, Scott Kingsley for his opening remarks. Mr. Kingsley, please begin.

Thank you. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's Third Quarter 2025 results. With me today are Annette Burns, NBT's Chief Financial Officer; Joe Stagliano, President of NBT Bank and Joe Ondesko, our Treasurer. Our operating performance for the third quarter reflected the positive attributes of productive asset repricing trends, the diversification of our revenue streams, prudent balance sheet growth and the additive impact of our merger with Evans Bancorp completed in the second quarter. Operating return on assets was 1.37% for the third quarter with a return on equity of 12.1% and an ROTCE of 17.6%. Each metric demonstrates continued improvement over the linked and prior year quarters, and importantly, reflects the generation of positive operating leverage. Our tangible book value per share of $25.51 at September 30 is 7% higher than a year ago and above the level it was at when we announced the Evans merger 13 months ago. This continued capital strength has us very well positioned to support all our strategic growth initiatives. The continued remix of earning assets, diligent management of funding costs and the addition of the Evans balance sheet resulted in an improvement in net interest margin for the sixth consecutive quarter. We are pleased with our progress to date with net interest margin expansion. However, recent and expected changes to Fed funds rates will likely challenge future margin improvements compared to our most recent quarters. Growth in noninterest income continues to be a highlight with each of our nonbanking businesses achieving productive improvements in both revenue and earnings generation year-over-year. We were also pleased to announce an 8.8% improvement to our dividend to shareholders earlier in the quarter, marking our 13th consecutive year of increases. This reflects our strong capital position and our generation of consistent and improving operating earnings. As we have stated before, our capital utilization priorities are to continue to support NBT's organic growth and the consistent improvement to the quarterly dividend we pay our shareholders. In addition, we appreciate the opportunity to evaluate and partner with other like-minded community banks. Returning capital to shareholders and opportunistic share repurchases is also part of our capital planning. And as such, we renewed our $2 million share repurchase authorization through the end of 2027. Before turning the meeting over to Annette to review our third quarter results with you in detail, Joe Stagliano will provide some additional color on our progress in the Western region of New York and other initiatives across the markets. Joe?

Thank you, Scott. We continue to build on the momentum of our successful Evans Bank integration. Since the merger, we've experienced solid growth in deposits in the Western region of New York and we are retaining key lending relationships despite experiencing approximately $30 million of net contractual runoff in the portfolio. Customer sentiment remains strong, and employee engagement is high. Let me walk you through some of our key market developments. In Buffalo and Rochester, we've had success recruiting and onboarding talented professionals across all lines of business, which complements the strong team we already have in place. Our new Webster branch in Greater Rochester opened in April, and it's off to a promising start. To support our growth initiatives in Rochester, we plan to open a financial center in the market during 2026. Additionally, we are exploring locations in the Finger Lakes to fill in our branch network in this attractive region. In the second half of 2026, we expect to break ground on a new branch location near the planned Micron chip fabrication site in Clay, New York. In addition, our current team of bankers and network of locations in the Mohawk Valley are well positioned to support the growth anticipated from Chobani's plans for a new facility expected to bring 1,000 jobs to the area. Our new Malta, New York branch near GlobalFoundries is seeing excellent traffic and growth. In the Hudson Valley, IBM has announced plans to expand in Poughkeepsie and we are seeing positive demographic shifts in the region. We entered this market through our merger with Salisbury Bank and are eager to improve our concentration in this region. Earlier this year, we opened our fourth branch in Burlington, Vermont, and we are seeing good momentum. We are set to open an additional branch office in Portland, Maine in early 2026. We've also secured a site in Torrington, Connecticut that will connect our presence in West Hartford with our locations in Litchfield County in early 2026. In addition, we remain focused on scaling our operations in New Hampshire, supported by the strong team of bankers we have in place there. Our team continues to evaluate both new locations and branch optimization using an active and structured process. This dual focus ensures that we remain agile and responsive to market needs as we maintain operational efficiency. I will now turn it over to Annette.

Thank you, Joe, and good morning. Turning to the results overview page of our earnings presentation. In the third quarter, we reported net income of $54.5 million or $1.03 per diluted common share. Excluding acquisition expenses, our operating earnings per share were $1.05, an increase of $0.17 per share compared to the prior quarter. Revenues grew approximately 9% from the prior quarter and 26% from the third quarter of the prior year, driven by improvements in net interest income, including the impact of the Evans merger. The next page shows trends in outstanding loans. Total loans were up $1.6 billion for the year, including acquired loans from Evans. Excluding consumer loans and a planned contractual runoff status and the loans acquired from Evans, annualized loan growth in 2025 was approximately 1% higher than in December 2024. Growth in commercial, indirect auto and home equity loans were partly offset by declines in residential mortgage balances. During 2025, we have experienced a higher level of commercial real estate payoffs while production has remained strong. We have captured quality lending opportunities across our markets, which has also provided growth in core deposits. This gives us the flexibility to remain disciplined in our loan pricing and focus on holistic relationships. Our total loan portfolio of $11.6 billion remains very well diversified and is comprised of 56% commercial relationships and 44% consumer loans. On Page 7, total deposits of $13.7 billion were up $2.1 billion from December 2024. Excluding the deposits acquired from Evans, deposits increased $250 million from the end of 2024, with growth in checking and money market accounts. 58% of our deposit portfolio consists of no and low-cost checking and savings accounts, while 42% is held in higher cost time and money market accounts. The next slide highlights the detailed changes in our net interest income and margin. Our net interest margin in the third quarter increased 7 basis points to 3.66% from the prior quarter primarily driven by the continued improvement in earning asset yields. Net interest income for the third quarter was $134.7 million, an increase of $10 million above the prior quarter and $33 million above the third quarter of 2024. The increase in net interest income from the prior quarter was largely attributed to the first quarter impact of the Evans acquisition, along with earning asset yield improvement. As a reminder, approximately $3 billion of earning assets repriced almost immediately with changes in the federal funds rate while approximately $6 billion of our deposits, principally money market and CD accounts remain price-sensitive. The opportunity for further upward movement in yields will depend on the shape of the yield curve and how we reinvest loan and investment portfolio cash flows. The trends in noninterest income are outlined on Page 8. Excluding securities gains, our fee income was $51.4 million, an increase of 9.8% compared to the previous quarter and an increase of 13.5% from the third quarter of 2024. The seasonally higher third quarter also benefited from a full quarter of Evans activity. Our combined revenue from retirement plan services, wealth management and insurance services executed $32 million in quarterly revenues. As a reminder, and consistent with historical trends, the fourth quarter is typically our lowest quarter in revenue generation for these businesses. Noninterest income represented 28% of total revenues in the third quarter and reflects the strength of our diversified revenue base. Total operating expenses, excluding acquisition expenses, were $110 million for the quarter, a 4.4% increase from the prior quarter and reflected a full quarter of Evans activity. Salaries and employee benefit costs were $66.6 million, an increase of $2.5 million from the prior quarter. This increase was primarily driven by the full quarter impact of Evans, higher incentive compensation and higher medical costs. Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended September 30, 2025, was $3.1 million compared to $17.8 million for the second quarter of 2025. The decrease in provision for loan losses during the quarter was attributable to $13 million of acquisition-related provision for loan losses in the second quarter, partially offset by net charge-offs returning to a more normalized level in the third quarter. Reserves were 1.2% of total loans and covered 2.5 times the level of nonperforming loans. In closing, growth in our net interest income and fee-based revenues drove our record performance in the third quarter and contributed to our meaningfully improved operating performance for the first 9 months of 2025. We are in a strong capital position, have growth opportunities across all our markets and are well positioned to take advantage of them. Thank you for your continued support. At this time, we welcome any questions you may have.

It comes from the line of Feddie Strickland with Hovde Group LLC. Please proceed.

Just wanted to start on expenses. You've got a full run rate of Evans, now on the expense line. I was just wondering if you could talk about where you're at in terms of cost saves and maybe what we should expect in terms of the total expense line over the next quarter or so.

Sure. We believe that our cost savings were primarily achieved in the third quarter, so we do not anticipate any significant additional impact moving forward. The run rate of $110 million we experienced in the third quarter remains an appropriate expectation going ahead. It's important to note that we usually implement merit increases at the beginning of the first quarter, with our typical expense growth generally ranging from 3.5% to 4.5%. This is how we view our outlook for 2026.

Got it. That's helpful. And just wanted to ask, thinking about loan growth, it sounds like you've got some new hires there that should help the pipeline longer term. What should we think over the next couple of quarters in terms of net new loan growth and keeping in mind what's the level of runoff that you expect in the residential solar and other consumer book?

So let's tackle that one together. In terms of our activity for the last 2 quarters, it's actually been very robust. We experienced a much higher level of payoffs than we had anticipated and quite frankly, than we had experienced a year ago. But I think as we roll into early to mid-2026, a low to mid-single-digit growth rate is probably appropriate for our markets. Stand-alone, our markets still have really good activity levels in them. And our pipeline, quite frankly, is very good. Getting things on the construction side to a closing outcome, as you know, in our weather, we probably don't close a whole bunch of those from December through February. But quite frankly, we like where the pipeline is with that and think there's really good opportunities. We will look at where we are from a balance sheet perspective right now and really like where we're centered holistically, which means an 85% loan-to-deposit ratio for us, quite frankly, is more comfortable for us than something in the '90s. We think it gives us longer-term optionality from an invested asset standpoint. So at that level and where we are in those expected growth rates, we could still move up earning assets; they might just not all be loans. But we're very comfortable with that from an outcome standpoint and think it's probably almost as important for us that we've continued this steady growth on the funding side, mostly on the core deposit side. So that's how we're kind of framing where we think the balance sheet moves.

Our next question comes from the line of Steve Moss with Raymond James.

Maybe just start off, Scott, maybe just following up on expenses here. You guys mentioned the recruitment of talent here and the de novo branches as well. Just maybe curious as to if you can size up what your expected talent recruitment is going to be and kind of how you're thinking about how many de novo branches you may add over the next 12 months or so?

I see it this way, Steve, and I'd like Annette and Joe to add anything I've missed. On the brand side, we're considering adding four to six new locations each year to strengthen our presence in certain markets where we're either new or not adequately represented. For instance, we've noted that Rochester, New York, is one of those markets where, after partnering with Evans, their focus was primarily on the east side of Rochester. However, we believe there are opportunities to expand in the Central City area and possibly the west side, where we might add two to four more sites over the next couple of years. Additionally, we've seen successful recruitment of new talent in Western New York, and after initially holding back from the Evans partnership for the first five or six months, we feel our team has performed well. Now, we're ready to be more proactive and add new team members who can help enhance our long-term growth expectations.

I would just say from an expense management perspective, I think we look at branch optimization to offset some of the growth initiatives and then as well as technology investments to help improve efficiencies. So given that, I don't think that we would see an outsized expense growth than what we historically see from NBT.

Okay. That's helpful. And then just in terms of maybe just thinking about your presence across upstate New York, just kind of curious, are you interested in additional M&A deals or just kind of how you're thinking about things at the current time?

Steve, I'd frame it kind of both ways saying that we are interested in building out the franchise that now goes from Buffalo to Portland and Wilkes-Barre, Pennsylvania to Burlington. Fill-in strategies for us are probably first in our mind. Would we move the franchise another 50 miles West, South, East for sure. But frankly, filling in some of those from an opportunistic build-out standpoint, including the potential for M&A is absolutely primary for us. So we have the opportunity to have discussions with like-minded smaller community banks. And we're hoping that we've left a good impression in that if long-term independence is not in their plans, they'll see the value proposition of talking to us.

Appreciate that, Scott. And then maybe just 1 on the core margin here, just kind of curious, any updated thoughts around purchase accounting accretion going forward here? And could we see any incremental core margin expansion here?

Great question. So from an accretion standpoint, I think that's fairly stabilized and appropriate run rate. So I don't think we'll have any material change of that over the next, let's say, 4 quarters or so. As we think about the margin, in the short term, with the potential for multiple rate cuts in our near future here, we think there might be a little bit of margin pressure, and that's really because even though we're neutrally positioned, our assets reprice almost immediately while we have to actively manage our deposit repricing. As a reminder, $6 billion of our assets of our deposits that we're able to reprice about $1.4 million of those are in CDs. So it might take a little like a full quarter to work through those to help offset those asset repricing. So the fourth quarter could see a little bit of pressure and then looking out into 2026, especially if we see an improvement in that shape of the yield curve, we could see some margin improvement jumping off of the fourth quarter.

Okay. And just 1 follow-up there. Just what percentage of loans are variable rate these days?

Somewhere around $3 billion are variable rate.

Yes. And Steve, that includes all of our assets that are variable. So the loans are probably $2.5 billion to $2.6 billion, which quickly in my head, that's a little over 20%. And then there's probably $100 million to $150 million worth of investment securities that are variable. And then currently, we find ourselves in a Fed funds sold position. So those overnight funds obviously move with changes in SOFR or Fed funds changes, and that's a couple of hundred million for us.

Our next question comes from the line of Mark Fitzgibbon with Piper Sandler.

Just wanted to follow up with a question on the solar loans. I guess I'm curious, is there any way to kind of accelerate the exit of those? Is there kind of any depth to the market to sell those loans?

That's a really good question and something we spend a lot of time with. Today, Mark, the answer is no for that. There is desire potentially for that asset. In other words, people still like the asset class a lot despite all of the volatility and future volatility associated with new originations. But remember, we still have a fair portion of our loans that were originated in the 2020 to 2023 operating years and they contain yields that are lower than the market is demanding today. So for us to move that on an accelerated basis, we would have to embrace a fair value loss today. And that's something we need to do. Those assets are performing, again, not utopian yields, but those assets are performing the way they're supposed to perform and our credit characteristics have been exactly in line with what we expected.

Okay. And then I guess I'm curious, are you seeing any pressure at all on the auto loan delinquencies right now?

Not significant at all. Quite frankly, it's been very consistent. Remember, we're in the A and B paper classes. I think both from an origination standpoint, we might see this going forward with a couple of the industry announcements that capacity for C&D lending might be more substantially impacted over the next 3 to 12 months. But for us, it's been great. And remembering, we're making our indirect auto loans in our footprint. Most of our footprint doesn't have meaningful public transportation, so people are making their car loan payments so they can go to work.

Okay. And then 1 for Annette. Annette, your comments earlier, I think you said with respect to the margin, it'd be challenging to improve it. Should we take that to mean that the margin will decline? Or do you sort of think you can hold the margin somewhere close to the current level?

So for the fourth quarter, that's where we're reflecting it might be a little bit of a challenge to hold but a few basis points in either direction. And then I think we kind of stabilize pending no further rate actions and have the ability to see a little bit of margin improvement quarter-over-quarter as we still have some opportunity to reprice our loan book.

And Mark, we've been very deliberate about making sure that we're holding spreads on new assets that we're winning. We don't think at this point in time, in sort of the credit cycle, which is probably closer to mature, is the right time to be reaching for growth.

Okay. And then lastly, no updates on the timing for the Micron technology project.

Yes. $64,000 question so thanks for asking it. Today, we still expect shovels in the ground at the site here late in the fourth quarter. But if you know our ZIP code very well, the shovel has to have a lot of pressure on it to get into the ground in the next couple of months. Our perspective today on that, Mark, is that the site will be improved relative to taking on the fill and because this site, quite frankly, is a touch wet, so I think the next 5 to 7 months are site fill in making sure that the activity has been compressed with the expectation that building actually starts mid-to late 2026.

Our next question is from the line of Matthew Breese with Stephens Inc.

A few kind of margin-related questions. First, do you happen to have the spot cost of deposits either at quarter end or most recent date and then I was hoping you could provide some color on the roll-on versus roll-off dynamics of fixed and/or adjustable rate loans today.

On the spot side, now let's get back to you. We don't have that sitting in front of us today. I will say this, we're pretty sure because we made some adjustments to deposit costs after the Fed rate change in September that October's cost of funds are probably slightly lower than September's. But my guess is it's measured in single basis points. So let's reframe your second part of your question if you would.

Yes. For your fixed rate and adjustable rate loans, what is the roll-on versus roll-off rates?

For our commercial portfolio, we currently have about a 50 basis point difference between our portfolio yields and origination rates. For indirect auto, we are almost aligned, which really depends on the curve and how we price those auto loans. Our new origination rates are slightly lower than our current portfolio yield, and this is likely to fluctuate each quarter. We have the most potential for improvement in our residential mortgages, where there is still about a 160 basis point gap between our portfolio yields and origination rates.

Okay. And then this 1 kind of leads into my next question, which is your securities yields are still pretty low relative to what you could go purchase something at today. When do we see a more pronounced pickup in securities yields as the back book starts to reset or mature?

So our portfolio today is very much a cash flowing portfolio. So it's mostly mortgage-backed securities. So it's pretty orderly. It's in the line of a couple of hundred million dollars a year from a cash flow standpoint. So we don't think that changes much. But we will acknowledge your comment that our portfolio yields are now below our peer group because we think we're the last ones in the peer group that did not do a one-time charge or a restructuring.

Okay. And just last one, Scott, your comments on perhaps earning asset growth beyond loan growth. I felt like it was a not so subtle hint that we might see some securities growth near term. To what extent might that happen? And to what extent do you lean into kind of your excess cash position to do that?

Yes. That's a terrific question. I think today, we have that flexibility today. And maybe over the last couple of years, we didn't enjoy that flexibility at the same level. So I think it's a duration-based risk/reward for us, Matt, that today, when you stay in the short term end setting aside expectations as short-term rates may come down a little bit, there's really not much of a penalty to stay in Fed funds or something very short term. That probably gets a little bit more definition to it after the expected changes in Fed funds rates here in the fourth quarter, and we'll assess it from there. When we look at that, we've never taken a real mismatch in terms of duration in our portfolios. So I wouldn't expect to start that in this cycle. But I do think an opportunity does present itself for us to continue to analyze if we can leg into that a little bit more. Remember we are very deliberate about how we handle the investment portfolio that we inherited from Evans and where we push those cash flows to what we disposed of and what we decided to retain. Our construct around investment securities continues to be making sure we have enough latitude to support the collateralization for our municipal deposits. So that's more of our focus points than whether we have incremental earnings opportunity associated with a $50 million, $60 million, $100 million leg in on the security side.

Our next question comes from the line of David Konrad with KBW.

I wanted to shift the conversation to fee income. It was a strong quarter, especially in insurance. Can you elaborate on what's happening in that area? Also, is a 7% annual growth rate something we can expect by 2026?

Good question. So for our insurance business, our third quarter is our most seasonally high, probably to the tune of about $1 million, and that's just some seasonality of some of our municipal customers. So the first and third quarter are typically higher for our insurance business. The growth rate of around 7%, I would say somewhere in those high mid-single digits is an appropriate run rate, seeing some good commercial growth across our business line. Our insurance business is very integrated with our banking business. So a lot of referral opportunities are related to that, and that's what drives the growth there.

And to follow that, David, the rate of change on rate increase that the insurance companies have been able to be approved for is a little bit less than we experienced over the last couple of years. So in other words, new rate structures, we're generating growth for most agencies in the 4% to 6% rate before you even add new customer development.

Got it. And then maybe last question and follow-up here. Help us out a little bit on next quarter and your outlook as we get a little bit more seasonally challenged in the fourth quarter for the total fee income business.

Yes. So historically, and Annette will remind me if I'm wrong on this, historically, fee income for benefits administration and insurance has typically been 6% to 8% lower in the fourth quarter than experienced in the third quarter. And there's nothing for us today telling us that we'd be outside of that expectation.

And I would also just remind there's probably about $1.5 million of unique items to the quarter gains in the third quarter. So that also kind of made the third quarter a little higher.

We have a question from Feddie Strickland with Hovde Group.

Just had a quick follow-up on capital. You talked a little bit about M&A down the road already. But just wanted to get your thoughts on capital management, any sort of capital ratio number you're trying to manage to? And could we see buybacks executed beyond the level of offsetting the stock-based comp?

Thank you for the question and for the reference point. Over the last two and a half years, we have been very deliberate about capital retention as we completed the Salisbury and Evans transactions. During that time, we were not very active in other areas because we wanted to ensure that our purchase accounting was accurate and that our estimates regarding dilution were appropriate. Now that we've moved past that phase, we feel quite comfortable. In fact, we have exceeded our expectations for returning to pre-announcement capital levels. Overall, we are currently in a strong capital position, and I would argue that on most days, we have an excess of capital. Given the risk profile of our balance sheet, I believe we are in a good place regarding our capital maintenance, both broadly and specifically for the bank, which allows us to pursue every opportunity without concern. Historically, we have aimed to cover equity-based compensation plans through repurchases to avoid dilution. However, considering the current valuations for high-quality earnings like ours, we might need to take a more active approach to repurchase activity. While capital management has not been our main focus traditionally, we find ourselves in a situation today where we feel that the market has not fully recognized our earnings capacity.

All right. Great. And just one last one on the margin. I understand the dynamics of repricing loans versus deposits and a lag on deposits. But it sounds like if we get some level of steepness in the yield curve and a couple more cuts, and you start to get the benefit of those deposit costs lower, maybe in the mid '26. I mean, could we see initial pressure on the margin near term, but maybe margins start to come up a little bit over time with maybe some backup loan repricing, the deposit lag piece and assuming we have some level of steepness in the curve.

I think that's a good summary of how we're thinking about margin and potential for margin improvement. Just a reminder that you're probably not going to see the same level of benefit that we saw in 2025 just because a lot of our loan book has repriced. And so it's really less of an opportunity than what we've seen.

And as I'm not showing any further questions in the queue, I will turn the call back to Scott Kingsley for his closing remarks.

Thank you. In closing, I want to thank everyone on the call for participating today and for your continued interest in NBT and at least for this week, go build.

And, thank you, Mr. Kingsley. This concludes our program. You may disconnect, and have a great day.

Thank you.