NBT Bancorp Inc. (NBTB) Earnings Call Transcript

Good day, everyone, and welcome to the conference call covering NBT Bancorp's Third Quarter 2026 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. [Operator Instructions] As a reminder, this call is being recorded. And now I'd like to turn the call over to NBT Bancorp's President and CEO, Scott Kingsley, for his opening remarks. Mr. Kingsley, please begin.

Thank you, Jonathan. Good morning, and welcome to this earnings call covering NBT Bancorp's Third Quarter 2026 results. With me today are Annette Burns, NBT's Chief Financial Officer; Joe Stagliano, President of NBT Bank; and Joe Ondesko, our Treasurer. We are pleased with our solid third quarter operating performance, which demonstrates the strength and momentum of NBT's diversified financial services franchise. We generated noticeably stronger earnings than in both the third quarter of last year and the second quarter of this year. Productive loan growth across our markets contributed to record net interest income for the quarter. We also remained very disciplined in our cost of funds management while focusing on net new account growth. We are very pleased with the engaged and consistent approach of our teams across the company. Operating return on assets was 1.41% for the third quarter, while operating return on tangible equity was 16.53%. Tangible book value per share ended the quarter at $27.75, an increase of 8.8% from a year ago. Our capital utilization priorities remain focused on supporting organic growth while maintaining our long-standing commitment to annual dividend increases. At $0.40 per share, NBT's quarterly dividend is 8.1% higher than the prior year and affirms our continued commitment to providing favorable long-term returns to our shareholders. Our strong capital levels also allow us to continue to evaluate a variety of strategic opportunities as well as enable measured share repurchases. We remain encouraged by the opportunities we see across our 7-state footprint. Through NBT's support of economic development projects, customer expansion activity and investments in new bank locations in several of our markets, we continue to position NBT for sustainable growth while supporting the communities we serve. Since 2019, the company has been able to successfully grow earnings at a 6% compounded annual growth rate while maintaining our conservative risk profile. And looking forward, we believe we are well positioned for the remainder of 2026 and beyond to continue executing on our diversified operating strategies. Before Annette reviews our third quarter results in greater detail, I'll ask Joe Stagliano to provide a brief update on semiconductor-related activities in our markets. Joe?

Thank you, Scott, and good morning. As we've discussed on prior calls, NBT Bank maintains a significant presence across many of the markets benefiting from New York's growing semiconductor and advanced manufacturing industry. With about 70 branches located across this corridor, we are already serving many of the businesses and communities connected to these developments. What stands out this quarter is the progress being made on several major projects and the growing evidence that their impact is extending beyond the project sites themselves. In Central New York, activity surrounding Micron continues to accelerate. Following the project's groundbreaking in January of 2026, construction in Clay has advanced from site preparation into more visible phases of development. Infrastructure investments are moving forward, crews began driving pilings for the first fabrication facility earlier this month and on-site concrete batch plant will support construction throughout the winter. While the first chip production is not expected until about 2030, we are already seeing increased focus on workforce housing and related development to support long-term growth. Central New York businesses, including many NBT Bank customers, are participating in site development, engineering, environmental construction, and other support activities related to the project. While many of these projects are still taking shape, the pace and scale of activity support our positive outlook for Central New York. We are also excited to expand our presence in the area with a new branch expected to open in the first half of 2027, about 1 mile from the Micron campus. More broadly, Micron is one part of a larger semiconductor story unfolding across Upstate New York. The Mohawk Valley remains an important component of that story, supported by ongoing activity around the Marcy site near Utica and continued interest in the region's manufacturing future. In the Capital Region, New York Creates, a leading semiconductor research and innovation organization supports research and development that strengthens New York's position within the industry. We were also encouraged by GlobalFoundries' recent announcement of plans to expand its campus in Saratoga County through the addition of 2 new semiconductor fabrication facilities, further highlighting the scale of investment taking place across the state. Taken together, these developments highlight the breadth of activity occurring across a well-established semiconductor corridor that spans Central New York, the Mohawk Valley and the Capital Region. For NBT, the significance of these investments extends beyond manufacturing. Projects of this scale can support housing and workforce development, infrastructure improvements, professional services, small business growth and local investment. We are well positioned to support that growth as these opportunities continue to evolve. What we are seeing across these regions reinforce our confidence in the long-term outlook for the markets we serve. Importantly, this opportunity extends beyond New York through semiconductor-related activity across our broader footprint, including GlobalFoundries' facility in Burlington, Vermont, where CHIPS Act supported investments are advancing next-generation semiconductor technologies and strengthening domestic manufacturing capabilities. With that overview, I'll turn the call over to Annette Burns to discuss our third quarter financial results in greater detail. Annette?

Thank you, Joe, and good morning. Starting on the results overview page of our earnings presentation, we reported third quarter net income of $58 million or $1.11 per diluted common share. Earnings benefited from continued balance sheet growth, record net interest income, net interest margin expansion and solid contributions from our diversified fee-based businesses. We generated record quarterly earnings and maintained strong capital levels. Turning to loans on the next page. Total loans ended the quarter at $11.9 billion, increasing $427 million or 4% from December 31, 2025, excluding our consumer runoff portfolios. All business lines experienced growth with commercial loans increasing $234 million despite payoffs remaining elevated from last year's levels and consumer loans increasing $116 million during the first 9 months of the year. Commercial and consumer portfolios remain well balanced at 56% and 44% of total loans, respectively. The increase in commercial loans reflects continued customer activity across our footprint and a disciplined approach to growth. We continue to maintain a diversified C&I and CRE portfolio with balanced exposure across industries and property types while preserving strong credit quality standards. New commercial originations during the quarter carried a yield of 6.41%, providing for continued repricing opportunities. On Page 6, total deposits were $13.6 billion at quarter end and increased modestly from year-end levels. Core deposits grew 2.6% in the first 9 months of 2026. We maintained a strong funding profile with almost 60% of total deposits in no and low-cost checking and savings accounts at a blended cost of 38 basis points. Total deposit costs declined by 1 basis point during the quarter to 1.32%, while the total cost of funds increased by 1 basis point to 1.42%. From year-end levels, we have experienced a favorable change in our mix of deposits out of higher cost time deposits and into checking, savings and money market products. During the year, $99 million of brokered CDs matured and $25 million of subordinated debt was also redeemed. We continue to tactically manage funding strategies to grow relationships while maintaining better than peer cost of funds. Net interest income and margin trends are highlighted on the next slide. Our net interest income increased to a record $143 million, up $5 million from the second quarter and more than 5% above the third quarter of 2025. The increase from the second quarter was driven by organic loan growth, higher earning asset yields, including increased purchase accounting accretion and the benefit of 1 additional calendar day in the quarter. Net interest margin increased 5 basis points to 3.78% compared with the prior quarter. Our balance sheet remains well positioned across a variety of interest rate environments and continues to demonstrate low sensitivity to rate changes. The opportunity for further upward movement in earning asset yields and net interest margin will largely depend on the shape of the yield curve with the reinvestment of loan and investment portfolio cash flows. The trends in noninterest income are outlined on Page 8. Excluding securities gains, our fee income was $52.9 million, seasonally higher than the prior quarter with an increase of $3.3 million and increased 2.9% from the third quarter of 2025. Growth was led by retirement plan administration revenues, which increased 8.7% from the prior year. Combined revenues from retirement plan services, wealth management and insurance services generated approximately $34 million in quarterly revenues, a new high. Noninterest income represented approximately 27% of total revenues in the third quarter and reflects the strength of our diversified revenue base. As a reminder, consistent with historical trends, the fourth quarter is typically the lowest revenue-generating quarter for these fee businesses, reflecting the seasonal decline in activity-based fees. Total operating expenses increased 3% from the prior quarter. Salaries and employee benefit costs were $70 million, a modest increase from the prior quarter. This increase was primarily driven by 1 additional payroll day and higher incentive compensation expenses, which were partially offset by lower employee benefit costs. The quarter-over-quarter increase in other operating expenses was primarily due to activity-based costs and a higher reserve for unfunded loan commitments. Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended September 30, 2026, was $3.8 million compared to $6.1 million for the second quarter of 2026. The decrease in the provision for loan losses during the quarter was primarily due to a lower level of loan growth compared to the prior quarter and a decrease in the allowance for loan losses due to a modest improvement in the economic forecast and portfolio mix changes. Reserves were 1.17% of total loans and covered 2x the level of nonperforming loans. We delivered record third quarter earnings, driven by broad-based business activity and continued momentum across the franchise. Our diversified balance sheet, meaningful fee income, disciplined balance sheet management and strong capital position continue to support consistent performance and position us well for sustainable growth. Thank you for your interest in our results. At this time, we welcome any questions you may have.

[Operator Instructions] Our first question comes from the line of Feddie Strickland from Hovde Group.

Just wanted to ask kind of thoughts about loan growth going into the fourth quarter. I mean I know the residential solar and other consumer, I guess, deceleration has been pretty consistent there. I know you've had some payoffs, but just could we see loan growth potentially tick up a little bit into the fourth quarter? Or do we expect something similar to what you saw in the third?

Thanks for the question. I think we're thinking a consistent outcome going into the fourth quarter. We like where we are from a pipeline standpoint, and we have a lot of really productive new construction projects in place across our markets. The fourth quarter is usually not the quarter of massive draws on construction projects because of where we sit from a weather standpoint. But I think you've hit it on the head. We've demonstrated a 4% growth rate for the first 9 months of the year, excluding those consumer portfolios, but 3% including them. So I think consistent for the fourth quarter is our expectations.

I appreciate that, Scott. And just in that, should we expect loan discount accretion to step back down from here after the little bit of an increase this quarter?

I would expect that our accretion related to purchase accounting kind of runs somewhere between $6 million and $6.5 million on average. It was a little bit higher this quarter. So it's all dependent on different levels of payoffs and things like that, but I would expect it to probably normalize again next quarter.

And just one last one for me on the margin. I appreciate that the shape of the yield curve is kind of going to determine what happens there. But let's say we have a couple more rate hikes here through early next year and the 5-year sort of holds up where it is. I mean, in that scenario, does the back book repricing and pretty low-cost deposits mean you'll continue to see the margin rise in that scenario?

So we speak to us being fairly neutrally positioned. So in the rising rate environment scenario, we see our $3 billion about of earning assets reprice almost immediately. I think we have some ability to lag on the funding side where, obviously, borrowings are repricing almost immediately while we can lag a little bit on our deposit costs. But we expect to probably respond to some deposit pricing pressures. So I think fairly neutrally positioned as it relates to rising interest rates, where we really see the benefit on our net interest margin is the repricing of our assets, both investment securities and loans continuing to see a favorable rate environment, especially where we price our loans in that 2- to 5-year spot. So that's where we see a few basis points of margin improvement continue as a trend.

I'd agree. I think Annette hit it on the head there. We've got a big portfolio of mortgage products, residential mortgage products that we would love to have inflect a little bit faster from a repricing standpoint. But at current rates, and I don't think our geographies are dissimilar to much in the country, at current rates that are hovering around 7%, activity is just at muted levels today.

And our next question comes from the line of David Konrad from KBW.

Annette, I just had a follow-up question on kind of the asset yields, specifically on the securities book. You had about 6 bps improvement there, but still relatively low yield at 2.76%. So just wondering what you're currently investing in, the yields there? And would you expect -- if the 5-year kind of 10-year stays in this range, is kind of 6 bps a good progression going forward? Or how do you think the securities portfolio will reprice?

Yes. I don't think it's wildly out of line, David. What I think is we're at $300 million of cash flows on an annual basis. So you're probably in the $65 million to $75 million a quarter. We have a little bit of our portfolio that's in a variable rate status, and we got probably a little tiny bump in September for that. Maybe that continues a little bit into the fourth quarter relative to inflection. But we're probably targeting stuff that's in the 4- to 6-year duration when we replace, and it's typically mortgage-backed instruments of some fashion or form. So very consistent and really consistent with what our pledging requirements are for our municipal deposit base. So like where that's headed. I think I've said this before, I think we're the lone person in our peer group that didn't do a portfolio reconstruction or restructuring. And I'll say this out loud, if we would have been one of those people considering or doing that in the first 6 months of the year, we probably wouldn't feel good about the assets we bought then. They would argue we'd probably be underwater already. So I think we can stay the course on that. We know that it's probably holding back total asset yields a little bit, but that's all coming back to us over time.

Great. And then one follow-up, just the expenses were a little bit higher than what I was looking for. Maybe any commentary on your expectations next quarter for expenses?

Sure. Expenses ticked up in the third quarter. For us, typically, the first half of the year is a little bit lighter for us, and we typically see a little bit higher expenses in the back half of the year. That's really activity-related timing of some initiatives -- so I think we'll continue to see probably a similar level in the fourth quarter. That's about a 3% increase over where we were this time last year. So that's kind of in line with our expectations. And it might not be all the same expense lines, but there's probably some different activities we're expensing related to occupancy, maybe professional and marketing, and that might offset lower OpEx. So similar levels we're expecting.

And our next question comes from the line of Manuel Navas from Piper Sandler.

I appreciate the update on kind of the CHIPS Act momentum. It seems like you're trying to make sure you have branches in the right places. On the other side of that, I mean, that will help you with deposit growth. On the other side of that, at some point, would there be an expectation of loan growth acceleration? And do you have the talent in place for that? Or is that something you will add as needed?

So a really good question. I think from a team standpoint, we really like where we're positioned today. And if you think of where that momentum is, it's Central New York into the Mohawk Valley and the Capital Region. And in fairness, we have really strong teams in those areas, arguably the strongest teams in the market. And so I think we're really well positioned to take advantage of those from an opportunity standpoint. I think what we'll see first through the construction phase of Micron and the second fab build-out at GlobalFoundries is honestly, might be a need for more lending opportunities for some of our customers who are in the contracting side of the world, maybe before we see household growth that we would expect to generate deposit growth. So I feel good about that. We've said this for a long time, and it's really hard to sort of prognosticate when this actually happens. But if you've heard from us that in our marketplaces and the kind of the way we think about disciplined sustainable growth, it's kind of in that 3% to 5% or 4% to 6% growth. If we get some outsized activities in the markets we just described, might that move us to 5% to 6% -- 5% to 7%? I think that would be our hope. I think the activity sort of lifts all boats, but we are really, really well positioned to get our requisite share of that activity.

I appreciate that. With that kind of in mind, do you have a sense of early thoughts from 2027? It seems like that's the 3% to 5%, 4% to 6% growth pace seems consistent. You talked a little bit about NIM, OpEx. Next quarter is about 3% year-over-year increase. Is that a similar pace into 2027? Any kind of broad items you can offer on those metrics in 2027?

Yes. So let's start those and sort of back in order of the ask. I think we think 2027 from a loan growth standpoint, knowing where we are with expected early payoffs and the runoff of some of our consumer portfolios, I think 3% to 5% is a really good starting point for that. And Annette may have some other color on this. But I think as we think about going forward into '27, broadly speaking, we think that merit changes for our people are probably in the 3% to 3.5% range. I think we think other operating expenses don't probably are not radically different from that. We do have some branch expansion activities in our plan, and so that may push that up a little bit 0.5% or something. And I think the only other thing that seems outsized for us, and we've now weathered this for 3 or 4 years in a row, probably like most people, is we kind of expect medical costs for our people to be double-digit increase again. And so we're doing lots of things to try to mitigate that outcome. But in fairness, we need our people to be healthy, and we need to have a robust program for them in order for them to be successful. So for today, we continue to look at solutions for that, but we think that's the expectation going forward.

[Operator Instructions] Our next question comes from the line of Steve Moss from Raymond James.

Scott, maybe just starting off on the retirement plan income. That was up about 9% year-over-year. Just kind of curious if you guys are thinking that's probably a good year-over-year run rate growth rate for that in the fourth quarter?

Yes. I don't -- I think in the fourth quarter, remember that the fourth quarter for us in that business is generally lower than the third quarter. There's a bunch of activity-based necessary outcomes, tax filings and other related things that we do on behalf of our customers. So typically, we see a $0.01 or $0.02 down in revenue in the fourth quarter in that business. And that's been pretty consistent for the last several years. I think if you were to think about that on a going-forward basis because I think our 8% or 9% growth was a year-over-year outcome. We'd probably be a little bit more tempered for that into '27, probably think that, that's more in the sort of the 5% to 7% range going forward next year. We had a really great year this year of onboarding some larger plans and some books of business that certain of our adviser partners moved to us early in the year. We would expect some of that for 2027, but we don't have sight lines on some of that, that we might have had a year ago today.

Okay. Appreciate that. And then in terms of just curious on the driver of payoffs here with regard to loans. Is it higher coupon stuff that's paying off? Or is it just expected maturities and things go in the current market? Any color you can give on the payoffs you guys are seeing?

Yes. Steve, we'd like to tell you that there's something that's really running the front of that. But I'll tell you, just from our perspective, as we've tried to work through that, there's a handful of things, which is as rates have inflected up a little bit, we certainly have customers that have decided to use their liquidity to take away maybe a high 6% or 7% yielding instrument on the debt side. The second thing is the asset values have remained very, very high. So we have a number of customers probably in advance of maybe their planning have monetized themselves out of certain assets, whether that be on the real estate side or even on the operating business side. And that continues to be -- I think there's a lot of investable dollars chasing return. And I think those businesses have been an example of that. And from a logical standpoint, we do a fair amount of construction financing. We're essentially at the end of the project or at some general term after the end of the project, we expect to be taken out as well. And maybe the last thing I'd say, and maybe it's just a couple of recent transactions is some of the people we compete with on the government finance side, on the agency side have been very, very assertive. We've had a couple of instances of being displaced by Farm Credit in the last quarter with terms and conditions that may make sense for them from their entity, but we can't validate as carrying them on the balance sheet of the bank. So kind of a combination of a lot of things. And I think good for us. I don't -- I think we thought if it was more systematic and directed at one particular cause, we may have a little bit more concern on future growth.

Okay. Appreciate that. And then I guess the other thing I'm curious on here is the auto loan originations at about 5.5%, pretty tight relative to the treasury. Just kind of curious, what are your thoughts on that book of business going forward? And how should we think about the pricing there in terms?

So I'll start with that, Annette, and feel free to jump in. I think how we look at that portfolio is in our markets across our 7 states, it's an asset our customer needs. And so the financing of something that they use every day is still paramount to meeting our customer needs. From a pricing standpoint, to your point, think about that having to price at a spread somewhere above the 2-year point of the curve. From a duration standpoint, we're starting to see that portfolio be sort of in the 30- to 36-month duration on a consistent basis. So early paydowns and accelerated return of principal is noticeable in that portfolio. I think about what we like about that is it really lines up well for us from an ALCO standpoint. So if you're going to make those commitments, to your point, in the mid-5 range, you better expect the duration to be a little bit lower than something you might make a commitment on for 5 to 7 or 10. So still very happy with that from a performance standpoint. We still have a charge-off and a delinquency level in that portfolio. It's very attractive for us. And we continue to move forward. We have aspirations to make sure that we're banking that customer on both sides of the balance sheet. And that's not the easiest thing to do from a systematic standpoint. But we're dedicated to making sure that holistically, it's more than a car loan.

Right. Okay. Appreciate that there. And then just on deposit costs, good to see them basically stable here, plus or minus. Just kind of curious, like, how are you guys thinking, like, is there going to be a lower deposit beta this cycle? Or just given that we're at a 4% Fed funds rate, maybe we go to 4.25%, 4.5%, a higher beta?

I think it's going to be similar to potentially higher. Just our customers are starting off at a much higher level than they were this last interest rate increase cycle. So they're already used to getting some yield for their excess cash. And I think the competition out there is probably a little bit stronger for good deposit relationships. For us, I think, we'll be actively managing that and continuing to focus on full relationships. But, I think, it should be similar and has a potential to be maybe just a little bit higher beta this cycle.