Nbt Bancorp Inc Q4 FY2025 Earnings Call

Good day, everyone. Welcome to the conference call covering NBT Bancorp's Fourth Quarter and Full Year 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 we begin, 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. As a reminder, this call is being recorded. I will now turn the call over to NBT Bancorp President and CEO, Scott Kingsley, for opening remarks. Mr. Kingsley, please begin.

Thank you, Sania. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's Fourth Quarter and Full Year 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 fourth quarter continued to reflect the positive attributes of productive fixed-rate 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 second consecutive quarter, with a return on tangible equity of 17.02%. These metrics demonstrate continued improvement over the prior year quarters and importantly, reflect the generation of positive operating leverage. Our tangible book value per share of $26.54 at year-end was 11% higher than a year ago. The continued remix of earning assets, diligent management of funding costs, and the addition of the Evans balance sheet resulted in a 36 basis point improvement in net interest margin year-over-year. Growth in noninterest income continues to be a highlight, with each of our nonbanking businesses achieving record results in both revenue and earnings generation for 2025. In the third quarter, we were pleased to announce to shareholders a year-over-year improvement of 8.8% to our dividend, marking our 13th consecutive year of annual increases. This is reflective of our strong capital position and our generation of consistent and improving operating earnings. Our capital utilization priorities focus on supporting NBT's organic growth strategies, as well as improving our dividend each year. In addition, our strong capital levels continue to allow us to evaluate a variety of M&A opportunities. Finally, returning capital to shareholders through opportunistic share repurchases is also a component of our capital planning. And as such, we repurchased 250,000 of our own shares in the fourth quarter. Our transition and integration activities over the past 8 months with the team members who joined us from Evans Bank have been highly successful and have reaffirmed our belief that we have added a customer and community-focused group of talented professionals to our ranks. We remain excited about our opportunities in the Western region of New York. Activities have continued to progress across Upstate New York's semiconductor chip corridor in the fourth quarter, including the official groundbreaking of Micron's planned complex outside of Syracuse. Site development and construction of the first fabrication facility are expected to commence immediately with completion targeted in 2030. I will now 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 $55.5 million or $1.06 per diluted common share. On a core operating basis, which excludes acquisition-related expenses and securities gains, our operating earnings were $1.05 per share, consistent with the prior quarter. Revenue generation remained favorable and consistent with the prior quarter and grew 25% from the fourth quarter of the prior year, driven by improvements in both net interest income and noninterest income, including the impact of the Evans merger. The next page shows trends in outstanding loans. Including acquired loans from Evans, total loans were up $1.63 billion or 16.3% for the year. During 2025, commercial production remained strong, but we did experience a higher level of commercial real estate payoffs. We have captured quality C&I opportunities across our markets, which have provided growth in core deposits, consistent with our 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 6, total deposits were up $2 billion from December 2024, including deposits from Evans. We experienced a favorable change in our mix of deposits out of higher-cost time deposits and into checking, savings, and money market products. 58% or $7.8 billion of our deposit portfolio consists of no and low-cost checking and savings accounts at a cost of 80 basis points. The next slide highlights the detailed changes in our net interest income and margin. Our net interest margin for the fourth quarter decreased 1 basis point to 3.65% compared with the prior quarter, as lower earning asset yields were largely offset by a reduction in funding costs. In addition, a higher level of lower-yielding short-term interest-bearing balances in the fourth quarter reduced NIM by 1 basis point compared to the third quarter. Net interest income for the fourth quarter was $135.4 million, an increase of $1 million above the prior quarter and $29 million above the fourth quarter of 2024. The increase in net interest income from the prior quarter was driven by the decrease in interest expense more than offsetting the decrease in interest income, as the decline in short-term interest rates impacted both earning asset yields and funding costs. 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 earning asset 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 $49.6 million, a decrease of $1.8 million compared to the seasonally high third quarter and increased 17.4% from the fourth quarter of 2024. Our combined revenues from the retirement plan services, wealth management, and insurance services exceeded $30 million in quarterly revenues. Consistent with historical trends, the fourth quarter is typically our lowest quarter in revenue generation for these businesses, while the third quarter is seasonally higher. Noninterest income represented 27% of total revenues in the fourth quarter and reflects the strength of our diversified revenue base. Total operating expenses, excluding acquisition expenses, were $112 million for the quarter, a 1.5% increase from the prior quarter, including higher technology, year-end charitable contribution and marketing costs. The effective tax rate for the fourth quarter was lower than the prior quarter at 20.3%, primarily due to the finalization of the assessment of the deductibility of merger-related expenses and the associated impact on the full-year effective tax rate of 23%. The Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended December 31, 2025, was $3.8 million compared to $3.1 million for the third quarter of 2025. The increase in the provision for loan losses was primarily due to a slightly higher level of net charge-offs in the fourth quarter of 2025. Reserves were 1.19% of total loans and covered 2.5x the level of nonperforming loans. In closing, the current level of net interest income and fee-based revenues have produced solid results with meaningful positive operating leverage, supported by disciplined balance sheet management as we've navigated three federal funds rate cuts in late 2025. Asset quality remains stable. And with our strong capital position, we are well positioned to pursue growth opportunities across all our markets. Thank you for your continued support. At this time, we welcome any questions you may have.

Our first question will be coming from Feddie Strickland of Hovde Group.

You mentioned in your opening comments that higher commercial real estate payoffs have contributed to slower loan growth. Do you anticipate any significant payoffs on the commercial side in the upcoming quarters? Additionally, how does this affect overall loan growth when considering the run-off portfolios?

Thanks, Feddie. Yes, we have officially surpassed the 100-inch snow mark in Central New York, and I appreciate your sentiments on that. Your question is a good one. In 2025, we anticipate around $150 million to $175 million in unscheduled commercial real estate payoffs. Where do they go? Primarily agency money, and in certain markets, private equity or private funding, particularly in larger urban areas like Southern Hudson Valley and some regions in New England, closer to Boston. This figure is significant, and while we see it as an outsized number, we are planning for it to be a potential risk for our growth attributes moving forward this year, especially considering that there are others also seeking yield. As rates have begun to decline somewhat, many of our sponsors are receiving offers from agency structures and other sources that are tempting to accept.

Got you. And along those same lines, I mean, can you just update us on what you're seeing in terms of loan pipelines, opportunity in terms of tight geography I'm particularly curious about Rochester and Buffalo since you've mentioned them in your opening comments.

Thank you. Across our franchise, from Buffalo to Portland, Maine, and from Louisbourg, Pennsylvania to Burlington, demand is strong, with pipelines performing better than at this time last year. We feel optimistic about the opportunities we are encountering. We focus on holistic approaches, so outcomes based solely on commercial real estate are less appealing than those involving a complete operating relationship with the sponsor or through commercial and industrial ties. There doesn't seem to be a significant gap in demand. However, due to the current cost of construction compared to early or mid-2024, fewer multifamily housing projects are in progress, which is where we mainly concentrate. Nonetheless, the existing projects present good opportunities. The pipeline looks promising in Western New York, particularly in Rochester and Buffalo, and our team feels very motivated. We've brought on some exceptionally talented individuals, and moving forward, we are quite optimistic about the opportunities we will find in Western New York.

And I guess just to drill down on that. I mean, is kind of the mid- to lower single-digit growth rate a good number for '26?

I think it is. And reminding people that we still continue to have our just south of $800 million, older loan portfolio that's in runoff. And we use last year as a marker for that, that's moving downwards about $100 million a year. So we're seeing good activity around C&I, and we're seeing good opportunities on the CRE side in most of our marketplaces. And again, we can exercise selectivity as to which ones we put our best foot forward for. And in fairness, starting in the fourth quarter, we saw better consumer lending activity, especially on the mortgage side. So upbeat that customers potentially who were thinking about moving for the last 2 or 3 years can deal with a low 6% mortgage rate, and given the dynamic of what most people have as equity in their home decide to do something else.

And our next question will be coming from Mark Fitzgibbon of Piper Sandler.

First question I had, it looked like, Scott, you had boosted your reserve against the solar book this quarter by a decent amount. I was curious if anything had fundamentally changed there?

No fundamental change there. I think we were trying to kind of right-size our coverage allowance, given that it is a runoff portfolio. So really, what you saw this quarter is kind of recalibration of that coverage ratio, but no trends or negative concerns as it relates to that book.

Okay. And then secondly, I was curious how, if at all, the tensions between the U.S. and Canada are impacting sort of the economy in the northernmost markets of your footprint?

Yes, that's a great question. I might have mentioned this before, but we really value our Canadian customers. We have strong ties with them, and many of our clients conduct cross-border business, particularly in areas like Western New York and near Plattsburgh in Northern New York. It's a significant concern. Canadian customers seem to be quite frustrated, whether they are seeking seasonal housing in the Adirondacks or engaging in trade. The uncertainty surrounding tariff rates and what will be available has contributed to this frustration. From my discussions, I've sensed a lack of trust, leading to hesitation about future and ongoing investments. This situation is troubling for us, especially since these regions aren't typically the highest growth areas. Therefore, maintaining a solid connection with our Canadian customer base is crucial for supporting their needs.

Okay. Great. And then I guess changing gears a little bit. As you think about M&A, I'm curious, are the hurdle rates of return that you're looking for higher today than in the past, given that the market really hasn't been enamored of many acquisitions in recent quarters and obviously, your own frustration with your stock price post-Evans.

So, regarding the bundler, thank you for your comments. We believe that the combination of the Evans transaction and our improvement in net interest margin, which increased by about 35 to almost 40 basis points last year, has elevated our earnings capacity from approximately $0.80 a quarter to $1. This change is significant, and we’ve worked diligently to reach it. At the same time, concerns about execution risks from M&A or potential dilution of our focus on other strategic goals are not an issue for us. The Evans transaction has gone as well as we could have hoped. Their team is highly engaged, and although we've had to implement some changes in our systems, they have adapted well. Moving forward, they seem optimistic. Your question about the hurdle rate is insightful. We are now a $16 billion bank, so the question isn’t just about the size of a transaction that interests us; it's also about whether we pursue an M&A opportunity that can yield at least 5% accretion. For example, if we're operating off a base of $4 a share, any potential deal would need to exceed $0.20 a share to warrant serious consideration. There are various paths to achieving this, but it typically involves either a modest geographic expansion of our franchise or a productive opportunity to fill in areas where we have less concentration. We are still having numerous discussions, and there are many high-quality, like-minded smaller community banks in our seven states, presenting ample opportunities. That’s our perspective on capital deployment.

And our next question will be coming from Thomas Reed of Raymond James.

This is Thomas for Steve. I wanted to start by asking if you could discuss any planned hiring initiatives as you work to strengthen your presence in specific markets for growth and whether these investments are reflected in your expense guidance.

Yes. And I might even ask Joe to help me a little bit on this one. So I think we believe that all of our geographies are investable today. So I'll just use an example. We've added a couple of really high-quality folks to the team up in Maine. We have a really nice base of customers in Maine, but we never fully extended our reach from the standpoint of full holistic banking, and we're doing more of that. So the folks that we brought on board have C&I backgrounds. We've committed to a branch site off the wharf in Portland, our first true retail branch site, and we're about to make a commitment for another one up there. Joe?

Yes. Sure, Scott. Branch site, just off the wharf, we call it Bayside. It's a marginal way. We've also signed a letter of intent down in Scarborough. So building out our main presence is really important to us. And why is that? We have good quality bankers up there and adding good quality bankers to the team, which Scott just alluded to. Now over in Western New York, the same thing, really good quality hires across all parts of the bank, including insurance and mortgage. Scott mentioned our mortgage results the last quarter. So we're seeing some really nice pipelines across our entire footprint. So where are our focus areas? Definitely, New England, Maine, we mentioned, but also New Hampshire, the Greater Manchester market, a really important market for us, where we're looking for some growth opportunities with some new branches, as well as in Rochester, already looking at sites in Rochester. We have a lot of intent that we've signed in the city and planning on moving a financial center there in downtown Rochester, as well as across other parts of the Western region. So still in targets, as well as some of our newer markets. We're excited about the prospects that they're going to bring to us.

Our next question comes from David Konrad of KBW.

Just had a question on the NIM outlook next year, it feels like maybe stability might be the key phrase. I'm not sure. But the great news is your deposit costs are down to 2%. The bad news is your deposit costs are down to 2%. It might be challenging to reprice. And your commercial book, now the portfolio seems to be pretty close to new originations. So maybe talk about the NIM outlook over the next few quarters?

Sure. I'll start on that one. So you're right. We have our net interest margin at 3.65%, which is a very strong NIM. We can really throw off some nice core earnings with a NIM like that. We are neutrally positioned, so we've been actively managing through federal funds rate cuts over the last few months. So when we think about our margin expansion, it's probably in that 2 or 3 basis points a quarter. Some of the factors that will influence our ability to reprice our book if you think about the lending side, probably our largest opportunity is in the residential mortgage book where we probably have somewhere in the 125 to 130 basis points of room there. Our other books are probably pretty close to market rates at this point. Another area where there's some opportunity is in our investment securities book, still have some repricing opportunity there, probably throws somewhere around $25 million in cash flows a month. You're spot on. We have very low funding costs. We talked about having right around $6 billion in deposits that we can actively reprice with market sensitivity. Probably the biggest opportunity there is in our CD book, probably 77% of that reprices in the next 2 quarters. So I think there is some room, but probably not to the extent that we've seen in 2025; it’s probably limited to a few basis points. Net interest income improvement is probably going to be more focused on our earning asset growth and the opportunities that we have there.

Yes. I'll follow up on that. It's a good observation about the commercial crossover. For the quarter, the new activity and loans were at rates similar to portfolio yields. This was partially due to yield curve changes during 2025, with the 2- to 5-year point coming down 60 to 75 basis points over the year. Earlier this year, we noted a gap between new production and portfolio yields, but that gap has narrowed due to natural market activity. In some markets, we are experiencing slight pressure on spreads. These are generally our best assets, and whether we are defending or exploring new opportunities, we are very interested in these types of credits. However, maintaining spreads above 200 or 225 basis points over SOFR has become more challenging in recent months, possibly due to current market demand. There was a slight slowdown in the second half of the year. Regarding our CD book, the duration for everyone is currently down, particularly in 5- to 7- to 9-month instruments. We may see elongation from us or others, allowing people to lock in yields as the rate structure seems to be trending downward rather than upward. Finally, I want to remind everyone that customers have become accustomed to receiving yield over the past three years. Customers with significant liquidity, whether keeping it on their bank balance sheet or moving it off, have learned what yield looks like. I believe they are effectively utilizing the treasury management tools we provide and are very smart in their funds management.

And our next question will be coming from Daniel Cardenas of Janney Montgomery Scott.

So maybe just a quick question on competitive factors throughout your footprint on the lending side. Would you say competition is fairly rational? Or are you beginning to see perhaps a pickup in pressure as people are looking for growth?

Yes. I would say a little bit as people are looking for growth, and if nothing else, a lot of defense when people have really solid customers where they're the incumbent, where they're defending. I don't think we've seen anything irrational from a structural standpoint. And those have seemed to make sense for us. I mentioned before, some of our payoffs came from agency-based funding sources where, in fairness, both structure and rate are something that are better normally for the customer than what our standards actually allow for that way. But I don't think it's pervasive, and we have so many different markets to be participating in that I wouldn't make a general construct out of that just today. But I will say this, if you're a highly rated company and you're doing well and you have a history of doing well, you've been able to demand a lower spread if you're interested in new money this year.

Good. And then on the deposits front, are there any markets that are better able to absorb a decrease in rates? As rates come down, are you going to be able to push down deposit costs in any markets better than others?

I would kind of frame it this way, and Annette, if you have something else, let me know. But we have such good market share in so many of our legacy markets that we've been able to do rational things as rates decline in those markets pretty uniformly. In some of our other markets where we don't enjoy that kind of a share, maybe we've had to keep rates a little higher for a little bit longer or we've got some concentration characteristics that haven't forced down the rates as fast as the Fed has moved. But generally speaking, the fourth quarter was pretty indicative of that. $3 billion of our assets reprice immediately upon a fed's fund decline, and it takes us a little bit longer. There's a little lag there to get the funding cost down. Maybe we're a month or 6 weeks behind, but so far, we've been pretty diligent at getting it to that point.

Great. And then just last question for me on the credit quality front. Any areas that you guys are perhaps tapping the brakes on? I mean, your credit metrics are good. Just wondering if maybe you're approaching any particular area with a little bit more caution than maybe you were 2 or 3 quarters ago.

Not necessarily anything new. We have a pretty diversified book. So we pay attention to concentrations. We're probably a little less excited about hospitality or the office space, but that's not new. So I don't think we have anything that's specific emerging trend from something that we're going to shy away with continuing to just monitor as maturities come due and make sure we understand what our customers' position is and their ability to refi when that maturity happens. But also pretty well balanced as far as what our maturity, no large maturity walls or anything like that. So just navigating customers and paying attention to our industry composition, but really no emerging industry or anything we're avoiding at this point.

Our next question will be coming from Matthew Breese of Stephens.

I wanted to touch on charge-offs a little bit. For a while there, meaning for the years kind of proceeding COVID, charge-offs at NBTB could be anywhere from 30 to 35 basis points per quarter routinely. And with the consumer balances and wind down and coming down, should we reframe charge-off expectations here to something lower? And how would you kind of characterize normal with the makeup of the current book?

Yes, Matt, that's a good question. Around five or six years ago, our charge-off rates were likely between 25 to 30 basis points. We had a fairly large unsecured consumer portfolio with LendingClub and Springstone, along with our residential solar book, which had a smaller impact. These factors contributed to higher charge-off rates. As these portfolios decrease, we expect to see lower charge-off levels, with around 15 to 20 basis points being more normalized as these books shrink. The residential solar charge-off rate is around 90% to 95%, compared to about 8% to 10% with the previous portfolio. So, by 2025, I think that's likely where we will see a new normalized rate.

And I think, Matt, if you think about it, that we've done such a good job in indirect auto lending and our losses historically have kind of been between 20 to 35 basis points. So despite the cars being way more expensive in 2026 than the last time that Matt Breese bought a car, we've held in very well on that, and the customers have performed quite well on that side. Someone read to me the other day, a statistic that our combined mortgage losses from 2020 to 2025 were $31,000. So we continue to lead with that product. It's really, really important in our core marketplaces. And so many other opportunities present themselves once you're the core lender on the mortgage side. So I don't see us taking our focus away from that line of business either.

Yes, not the greatest auto customer here. Annette, while you were discussing the reserve on solar, has the appetite to sell that book changed at all? And maybe I'm connecting the wrong dots, but one of my thoughts as you were discussing the recalibration there was whether or not you've been listening to bids or rethought kind of what the mark should be on that book?

I'll start with that one, Matt, and then have Annette jump in as well. The dilemma we have is so much of our production was sort of in the 2020 to early 2023 timeframe where we experienced really productive but substantial growth in that portfolio. And I think we all knew what the rate structures look like in the world then. So from a marketability of that portfolio, which we would move out of if we could find something that made sense for us. But right now, it's really just a rate question. I think the assets are performing much better than most other solar portfolios in terms of loss rates and customer performance. But the rates are low. And so for us to do that would be a substantial outcome. And much like investment portfolio restructuring, we're kind of curious. If we can't find something that's got a terminal value above zero, we don't like to do it. So I think for us, we're hanging in there, waiting for the customer to pay us back and redeploy those proceeds and other things.

Understood. And then last one is just on share repurchases. This quarter's level is a bit higher than I was expecting. What are some of the catalysts or triggers for you to repurchase stock? And is what we saw this quarter something we might see in early '26?

Yes. Great question, Matt. I said this last quarter, I thought I was going to get to go my whole career and not buy shares. But truthfully, the opportunity presented itself. And to your point, two things. Value price, because somebody pointed out earlier, we think our valuation does not fully reflect the improvements we've had from an operating earnings standpoint. And number two is capacity, right? So with our change of earnings capacity, essentially, those share repurchases that we did in the fourth quarter, a little over $10 million worth. We self-funded in the quarter and didn't change any of our capital ratios. So I think it presents an opportunity for us to follow that pattern like we did in the fourth quarter going into the future. And we probably have more capacity than that. But I'm saying we think we can self-fund the level that we bought in the fourth quarter every quarter.

Our next question will come from Feddie Strickland from Hovde Group.

I had a couple of quick follow-ups. First on the margin. I did notice accretion income picked up some there. Just to clarify, the margin still increased in the first quarter even if that normalizes back down.

So accretion, usually, there are a handful of accelerated payoffs or affecting accretion during the quarter, which are very hard to predict. We think working through some of the federal fund rate cuts that happened in December, the margin will probably be fairly stable, if not, maybe affected by a basis point or 2 barring any changes that are normalized accretion. So that's kind of how we're thinking about margin for the first quarter.

Okay. Got it. And then just on fees, I saw there were some seasonal activity-based fees in the wealth line. Do you have a sense for how much of the linked quarter growth was seasonal?

So probably somewhere around 300,000 to 400,000 was seasonal related on the wealth side. So just some activity-based fees. But all in all, a very strong quarter with organic growth, and our market helped a little bit with that. On fee income in general, there's probably somewhere around $1 million to $1.5 million of BOLI gains and other securities gains that are a little harder to predict the activity there. I think, BOLI, on a normal run rate basis is somewhere around $2.4 million.

Yes. As we've grown into a larger enterprise, the seasonality has become less pronounced for us. Just as a quick reminder, the insurance business usually performs well in the first and third quarters around renewal times, with slightly lower activity in the second and fourth quarters. The benefits administration and retirement plan administration businesses tend to be solid in the first three quarters but see reduced activity in the fourth. Your point is valid. Wealth had an exceptionally strong year and a robust finish, partly due to seasonal factors, but we are generally in a favorable position across all these segments. Additionally, it's important to note that in our first quarter, we usually incur $0.04 to $0.05 more in operating costs that are not typically seen in other quarters. This is related to seasonality, as it is more costly to plow and heat than to mow and cool. We also experience higher payroll costs and usually higher stock-based compensation expenses in the first quarter due to the timing of our award grants. Therefore, we are always mindful of the $0.04 to $0.05 impact that the first quarter has on operating expenses, which other quarters do not typically experience.

And I would now like to turn the call back to Scott Kingsley for his closing remarks.

In closing, I want to thank everyone on the call for participating with us today, and we appreciate your interest in NBT. Stay warm. See you next time.

Thank you, Mr. Kingsley. This concludes today's program. You may now disconnect.