Operator: Good day, everyone. And welcome to the conference call covering NBT Bancorp’s Fourth Quarter and Full Year 2023 Financial Results. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. Corresponding presentation slides may 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 two, 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, non — certain non-GAAP measures will be discussed. Reconciliations for those numbers are contained within the appendix of today’s presentation.

At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to NBT Bancorp President and Chief Executive Officer, John H. Watt, Jr. for the opening remarks. Mr. Watt, you please begin.

John Watt: Good morning. Thank you, Norma. And thank you all for participating in this earnings call covering NBT Bancorp’s fourth quarter and full year 2023 results. Joining me today are NBT’s Chief Financial Officer, Scott Kingsley; our Chief Accounting Officer, Annette Burns; our Treasurer, Joe Ondesko; as well as our President of Retail Banking, Joe Stagliano. It was a very active quarter at NBT, while navigating the volatile interest rate environment we observed that the consumer is still spending and that small businesses are still investing. At the same time, we continue to experience movement to a normalized pre-pandemic credit environment. I will note that the successful integration of our August acquisition of Salisbury Bancorp positions NBT well for growth in adjacent markets and for future strategic growth.

Let me take a moment to highlight activity across our businesses. First, our operating results include earnings per share of $0.72 for the fourth quarter and $3.23 for the year. Return on tangible equity was 15.78% for the full year and the year-end tangible equity ratio grew 11% to 7.93%. Excluding the Salisbury acquisition we achieved commercial and consumer loan growth of 4%. That growth was diverse with our core commercial lending, business banking, residential mortgage and indirect auto businesses all participate. As noted in 2023, we experienced a resilient consumer and business owner. Our indirect auto business had a productive quarter with originations of over $141 million and $575 million for the full year. Small business originations were up 9% year-over-year.

Credit quality at NBT is normalizing, although each of our core credit portfolios continues to perform at levels better than those we experienced prior to the pandemic, we have seen some migration into the criticized category in our commercial lending business often historically low base. Like the rest of our industry, our cost of funds has risen as our customers continue to seek out higher yielding deposit products. Our full cycle deposit beta at year-end was 28%. We continue to enjoy high account retention levels, our funding sources are robust and we have the headroom we need to continue to execute our organic growth plans in 2024. Our fee-based businesses continued their solid performance in Q4 and for the full year. For the year, our combined benefits administration, wealth management and insurance businesses generated revenues of almost $100 million.

Total non-interest income was 29% of total revenue for the full year. Activity along the upstate New York chip corridor was positive in Q4 with large public and private investments being announced. Most significantly, the Albany Nanotech Complex called New York creates received $10 billion in investment commitments from large semiconductor manufacturers and the federal government. The activity generated along the chip corridor will drive long-term transformational economic growth across our core markets and promote long-term success at NBT. On Monday, our Board approved a $0.32 dividend payable in March, which represents a 6.7% increase over the dividend paid in the first quarter of 2023. It’s also notable that we marked 11 consecutive years of annual dividend increases in 2023.

Going into 2024, NBT is positioned with strong liquidity and capital levels, a diversified business mix, highly effective risk management practices and an expanded team of experienced professionals I will turn the call over to Scott and Annette to talk in greater detail about the outcomes associated with our financial performance for the fourth quarter and the full year. Following their remarks, we will take your questions. Annette, over to you.

Annette Burns: Thank you, John, and good morning, everyone. Turning to the results overview page of our earnings presentation. Our fourth quarter earnings per share were $0.64, operating earnings per share were $0.72, which excludes $0.08 per share of acquisition expenses, securities gains and an impairment of a minority interest equity investment we incurred in the quarter. The fourth quarter had the full impact of the Salisbury acquisition, which was completed in August of 2023. The fourth quarter operating results were $0.14 and $0.12 lower than the fourth quarter of last year and linked third quarter respectively. We continue to experience increases in funding costs that have exceeded the improvements in earning asset yields, which have challenged net interest income growth.

A businesswoman signing relevant documents at a bank branch for a commercial real estate loan approval.

Tangible book value per share of $21.72 at December 31st was up $1.33 per share from the end of the third quarter and up a $1.07 for the fourth quarter of 2022. The next page shows trends in outstanding loans. Total loans were up $1.5 billion from the fourth quarter of 2022 and included $1.18 billion of loans acquired from Salisbury. Despite productive growth in our indirect auto, residential mortgage and commercial real estate portfolios quarter-end loans were down $17 million from the end of the third quarter and reflected lower commercial line utilization, the continued planned run-off of our other consumer loan portfolio and principal amortization of our solar residential loans. Fourth quarter loan yields were up 11 basis points from the third quarter of 2023, reflective of continued higher new origination yields.

Our total loan portfolio of $9.65 billion remains very well diversified and is comprised of 52% commercial relationships and 48% consumer loans. On page six, total deposits of $11 billion were up $1.5 billion in 2023 and included $1.3 billion of deposits acquired from Salisbury. At the end of the fourth quarter, deposits were down from the end of the third quarter as expected. Municipal deposits declined $225 million from the seasonally high third quarter, generally in most of our markets, municipal tax collections are concentrated in the first and third quarters of each year. In addition, following the industry-wide liquidity challenges which arose near the end of the first quarter of 2023, the company proactively added over $0.25 million of incremental wholesale deposits.

NBT’s liquidity profile has continued to remain very stable, and as such, in the fourth quarter, we allowed $132 million of those balances to contractually run-off. The company continued to experience remixing from its no interest and low interest checking and savings accounts into higher yielding money market and time deposit instruments again in the fourth quarter. Our quarterly cost of total deposits increased 251 basis points, compared to 118 basis points in the linked third quarter and total cost of funds increased 22 basis points from the prior quarter. We have included a summary of our deposit mix by type, which illustrates the diversification and deep granularity of our customer base. The next slide looks at the detailed changes in our net interest income and margin.

The fourth quarter net interest income was $4.3 million above the linked-quarter — third quarter results primarily from the full quarter impact of the Salisbury acquisition, which was partially offset by a 6-basis-point decline in our net interest margin. During most of the fourth quarter, NBT made a Fed Funds sold position which created incremental interest income given robust short-term yields. Although, we experienced a slower rate of growth and cost of funds late in the fourth quarter, we continue to expect modest additional funding pressures to persist in 2024. I will now turn it over to Scott to review the rest of the results.

Scott Kingsley: Thank you, Annette, and good morning, everyone. The trends in non-interest income are summarized on page eight. Excluding securities gains, our fee income was up $3.7 million or 11% from the fourth quarter of 2022 to $38 million and down 6% from the linked third quarter as expected. Revenues from our retirement plan administration business were down $1.6 million from the third quarter and included certain actuarial and compliance services, which are seasonally concentrated in the third quarter. Our insurance agency revenues were $700,000 lower than the prior quarter, reflecting higher commercial policy renewals in the third quarter. The fourth quarter wealth management services included a full quarter contribution from the Salisbury trust and advisory businesses, but comparatively offset by certain third quarter tax preparation fees.

The diversification of our revenue generation sources continues to be a core strength of the company. The annualized run rate of our combined third quarter and fourth quarter non-interest income generation was over $155 million. Turning now to non-interest expense. Our total operating expenses excluding acquisition expenses and an impairment charge were $87.7 million for the quarter, which was $5 million or 6% above the linked quarter and 11.7% above the fourth quarter of 2022. Quarter-over-quarter increases in salaries and employee benefits, technology services, occupancy, advertising and FDIC assessment costs including a full quarter of Salisbury expenses. As indicated in our earnings release, we did record a full $4.8 million impairment to our minority interest investment in a provider of financial and technology services to residential solar equipment installers.

Although, we believe their technology platform and broad network of installers has demonstrated market acceptance, significant challenges and constraints in capital markets has resulted in uncertainties related to their ability to continue ongoing operations. On the next slide, we provide an overview of key asset quality metrics. We recorded a loan loss provision expense of $5.1 million in the fourth quarter, which was $1.2 million or $0.02 a share, higher than the $3.9 million provision recorded in the linked third quarter, excluding the Salisbury day one acquisition-related provision recorded in the third quarter. Net charge-offs were 22 basis points in the fourth quarter of 2023, compared to 18 basis points in the prior quarter. Reserve coverage of 1.19% of total loans was consistent with the linked third quarter and 5 basis points lower than the fourth quarter of 2022 reflective of continued portfolio mix changes.

We believe that charge-off activity will continue to return to more historical norms and expected balance sheet growth and continued mix changes will likely be the drivers of future provisioning needs. Non-performing loans increased $13.6 million from the end of the third quarter, attributable to a single diversified multi-tenant commercial real estate development relationship in which we are a participant, which was placed into non-accrual status during the quarter. The relationship is being actively managed and recent appraised values continue to support its carrying value. As I wrap up prepared remarks, some closing thoughts. The market volatility and uncertainty that arose in early March, accelerated our funding cost pressures, which has resulted in lower net interest margins.

Our well-balanced organic loan growth, constructive results from our recurring fee income lines and solid credit quality outcomes, have allowed us to productively offset a portion of the challenges on net interest income generation. Lastly, our post-acquisition capital levels continue to put us in a favorable position as we consider future growth and deployment opportunities that. With that, we are happy to answer any questions you may have at this time. Norma?

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

Steve Moss: Good morning.

Scott Kingsley: Good morning, Steve.

John Watt: Good morning, Steve.

Steve Moss: Maybe just starting off here with on the funding side of the equation. Just curious to where deposit costs ended the quarter and just kind of how you are thinking about the first half of funding costs ahead of potential rate hikes here?

Scott Kingsley: Yeah. So, thanks, Steve, for the question, obviously. We ended the year at about $155 million total deposit costs. We have watched that skewed up a little bit here as we have started the new year, but not a lot. The pressure that seems more pronounced through the mid-October, mid-November timeframe appears to be dissipating and so we are holding much closer to stability both from a rate standpoint and a balances standpoint.

Steve Moss: Okay. Got it. And then just as we think about rate cuts here, if we get Fed starts cutting rates, just kind of curious as to how you are thinking about the margin and maybe how quickly you might pivot on the funding costs going forward?

Scott Kingsley: Again, Steve, really the important thing for us from a pricing standpoint, we have — on a forward look, we presume that there are Fed rate declines in 2024. The forward curve suggests 6 or 7, Dow Jones [ph] suggest half of that. We are probably forecasting somewhere in the middle. So for us, if those rate cuts start, it gives us an opportunity to have a dialog with our customers relative to lowering funding costs. We can get out in front of that on-time deposits, for — so for expiring time deposits, short-term CDs, we can set different rates upon expiration and we are in the process of doing that. The opportunity for us to lower cost truly comes from our money market portfolio, a little over $3 billion of funds that have a high 3% cost attached to them currently, that once we start to get some momentum on the downside, that’s the group that we can discuss nearly start to move and simultaneous have really logical discussions with our customer.

Steve Moss: Okay. That’s helpful, Scott. Appreciate that. And on the lending side, just curious where — how you are feeling about the loan pipeline and the thoughts around the outlook for growth here. I realize, it looks like the solar piece is going to be in a bit of a run-off mode that might be a little bit of a headwind, so just kind of curious on how you think about all that?

John Watt: Steve, here’s how we are thinking about the year, mid-single-digit growth still achieve — very achievable. The year-over-year pipelines are slightly lower going into first Q, but traditionally in the markets we serve first Q is slower than the rest of the year. So we would expect they will pick up. On the business banking side, they had a really strong year last year, that — we fully expect that’s going to carry over into 2024. So for the core business, mid-single digits is how we are thinking about.

Steve Moss: Okay. Great. Thank you very much. I appreciate all the color.

John Watt: Thank you. We appreciate the questions.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Chris O’Connell with KBW. Your line is now open.

Chris O’Connell: Hey. Good morning and congratulations…

John Watt: Good morning, Chris.

Chris O’Connell: … John on the retirement announcement and Scott, Annette and Joe on the promotions.

Scott Kingsley: Thank you, Chris.

Annette Burns: Thanks.

John Watt: Thanks, Chris.

Chris O’Connell: So just wanted to start off on the fee side. I know that you guys mentioned some seasonality that occurred in the fourth quarter on the insurance and benefit plan, just hoping to get where you think those could rebound to as a starting point for 1Q?

Annette Burns: So we like to think about 2024’s run rate by starting with combining the third quarter and fourth quarter — average as third quarter and fourth quarter together as kind of the base run rate and then kind of think about mid-single-digit growth rate off of that base and that’s kind of how we are thinking about 2024 run rate.

Chris O’Connell: Okay. Got it. And then as far as the expenses go, I mean, I know that there was some clean up and some expense mentioned post the Salisbury acquisition that brought some things up in the fourth quarter. Can you just remind us is still like how much of that maybe comes out and whether there some offsets and where we could start off the year on the expense side?

Scott Kingsley: Sure, Chris. I will take a run at that one. So, yes, historically, and similar to our fourth quarter of this year, we are little seasonally higher in operating expenses in the fourth quarter. Some of that relates to finishing out certain initiatives. It was probably a little bit more pronounced this year, because some of the things that we are working on internally, we put aside as we finished the Salisbury transaction. Couple of things to think about, as it relates to customer retention and branding activities. Those are a little higher for us in the fourth quarter than they would have been otherwise, because we were focused on the Salisbury customer as well, both from a retention standpoint and growing in some additional new markets that we previously had not had access to.

So as we think about that quarter end $87.5 million, $88 million run rate. When we roll into the first quarter, with the exception of reminding everyone again, usually for us in the first quarter, we picked up a couple of cents a share of additional costs associated with payroll taxes in the first quarter and stock-based compensation. We usually have another $0.01 per share in incremental seasonal utility costs. Yes, it has started to snow in upstate New York. So the clouds are out and the heat is on. We also expect Chris a 2.5% merit change for our people and we usually do that towards the tail end of the first quarter in the month of March. So we would expect that on a going forward basis. In terms of how we will think about incremental hiring for the organization, given there are some headwinds relative to revenue generation very opportunistic and structural support only that, otherwise we will be thinking about replacement of the folks that we need within our structure, but in terms of adding people to the organization opportunistic and again necessary structural.

Chris O’Connell: Great. That’s helpful. And do you guys have an overall expense growth target either ex or including Salisbury for the full year?

Scott Kingsley: Chris, on a full year basis, probably have to come back to you with that one. I think if we looked at it from a gross-up of fourth quarter full quarter inclusion of Salisbury, if we think about a 2.5% or so change on the salaries and benefits line and then maybe something a little smaller than that for the rest of our non-operating expenses, remembering that we think we got a full quarter worth of Salisbury costs in there. And honestly, we think we have got a full quarter worth of the cost saves that we thought we would get in the Salisbury acquisition.

Chris O’Connell: Great. And then on the seasonal muni decline, given the environment and just how difficult it is. I mean, what’s the confidence level that that volume is able to come back into the first quarter and rebound, and if so, do you think it will come back in the same types of products or will it be higher-yielding types of products?

Scott Kingsley: Yeah. So, Chris, really good question. So, I think, as you know, we don’t bank very, very large municipalities. We tend to bank counties, towns, villages, school districts. So as tax collection start to roll in for them, we would expect that they would be using product mix similar to what they had in the second half of 2023. That being said, most treasury functions are very aware of interest earning opportunities, whether it’s on our balance sheet or someplace else. So I think that goes across our base not even just the municipal base. So I think we are always weary of that. But that being said, I think, the pattern of utilization of how organizations have to cash flow themselves is likely to stay very similar.

So, after people get done making their real estate payments towards the end of January, we would expect those levels to kind of move back to where we were in the fourth quarter. As it relates to the commercial side of our customer base and maybe even the consumer side, we think we saw instances of people using their own money to pay back their debt obligations in the fourth quarter. So people just look at thinking about balance sheet efficiency, despite the fact that there were still short-term yield opportunities out there that we are so much more robust and they enjoyed for the last five years or 10 years. But I think, again, it’s just the line of how does the — how do our customers handle their treasury efficiency. And obviously, we provide tools for them to do that and give them good advice along the lines of, what’s the most productive thing for them to do.

As the cycle starts to evolve and maybe we get into a lower rate cycle, I think that’s why we can actually call to our customer, and say, what’s happening in the market, because we have been having so much dialog with them about what’s happening on the way up.

Chris O’Connell: Great. Really helpful. And last one for me, I know you guys give the fixed and floating breakdown of loans, I think, it’s 39% adjustable or floating. But do you have the percentage of loans that would immediately reprice after Fed Fund cut?

Scott Kingsley: Sure. I think, for modeling purposes, I used $2 billion of loans that would reprice immediately with the change in Fed Funds, which presumes an immediate and correlation down in SOFR, in terms SOFR. So it’s mostly commercial loans for us. There’s probably some home equity type instruments that are out there, but for us, relatively small.

Chris O’Connell: Great. Thanks for taking my questions.

Scott Kingsley: Appreciate it, Chris. Thank you.

John Watt: Thanks, Chris.

Operator: Thank you. [Operator Instructions] One moment for our next question. Our next question comes from Alexander Twerdahl with Piper Sandler. Your line is now open.

Alexander Twerdahl: Hey. Good morning all.

Scott Kingsley: Good morning, Alex.

John Watt: Good morning.

Alexander Twerdahl: Just back to the sort of the NIM conversation. Appreciate all the color you have given so far, but maybe just kind of your thoughts for the NIM in the first couple of quarters of the year, assuming we don’t get any rate cuts until kind of that May timeframe, which I think is what the forward curves says today.

Scott Kingsley: Yeah. So, Alex, I think, if we were framing it this way, we would say that, we have — I think a much better chance of thinking that our improvement in asset yields with the repricing of new products has a chance to catch back up to where the funding cost increases are. Whether we get there in the first quarter not, jury is still out on that, but I think that, the fact that we have been losing 6 basis points to 90 basis points a quarter on that net change, in other words, asset yields have been fall, have — new asset yields just haven’t kept up with where funding needs have need to be. I think we have reached a point where stability could be the outcome. So, if you were handicapping, net interest margin somewhere around where we finished in the fourth quarter, plus or minus 3 basis points or 4 basis points.

Alexander Twerdahl: Okay. And then just kind of given the commentary on deposits and sort of trying to reprice them as quickly as possible, I guess, given we get like one or two rate cuts in May, feel like the third quarter, fourth quarter of the year. Do you think you have enough pricing power on the deposits to actually offset that $2 billion of loans that repriced and all the cash that price lower?

Scott Kingsley: I think if we have an orderly step down at 25 basis points a quarter or 25 basis points and 1 times or 2 times or 3 times. We could be close to that Alex. I think if we get six or seven cuts and they go much faster, it’s much harder to accomplish that. Because now you are out there, multiple times with your deposit customer changing that outcome. Remember, we don’t have any dialog with our variable rate asset customer, they just get the new rate. So I think it just takes more shepherding in the field.

Alexander Twerdahl: Okay. And maybe just a little bit of commentary on sort of the loan growth and sort of what you are seeing out there, is lower loan growth this quarter more reflective of a little bit more competition coming in, saying, rates are going to go down, we will give you a better rate and you guys are not chasing after that or is it just less demand in the market, or I guess, sort of what do you think sort of happened in the fourth quarter that kind of kept that overall loan growth subdued?

John Watt: Couple of things come to mind, Alex. I have been focusing on line of credit usage. It’s historically low, and Scott indicated, and I agree that smart customers are using their excess cash to pay down debt. So we see that. Eventually that’s going to come back. We had a couple of payoffs in Q4 that we did not anticipate. I think that’s episodic, that added to the loan growth story in Q4. I say this all the time, it’s firmly competitive out there all the time. So do we see pricing challenges on the loan side that are any different than they have been forever. No, but it’s brutally competitive and from a risk management perspective, we are very thoughtful about what we want to do and what we don’t want to do and what other products and services we can also offer our customer at the same time to ensure robust profitability with all of our relationships.

So mid-single-digit for our NBT in these markets. That’s not an unusual year. Sometimes a little higher than that. But what I do know is the team that is on the ground across all seven states is ready to and has identified the opportunities that are attractive to us and we will be there at the table when they are up.

Alexander Twerdahl: Got it. That’s helpful. I mean, would you say, the spreads in general with the five-year coming down on commercial deals, has the pricing kind of remain sort of sticky even though the five years come down or is it, are customers saying, wait a second, rates have come down, you guys get to do a little bit better?

Scott Kingsley: Yeah. Alex, it’s a great question. In our customers’ mind, right? We have spent the last 15 years with the customer being coached into a spread off the five-year, three-year, seven-year point of the curve, the midpoint of the curve and what did we have to do during part of last year is, we had to say, we are not sure we are capable of actually living with that outcome for certain of our credits because of our short-term pricing was from a funding standpoint. So and remind — sometimes we have to remind ourselves, higher for longer was the tenant out there through 1st of December. It wasn’t until 1st of December where people said, oh, we are going to have this naturally substantial walk down in rates. So if you think about what that was, even if we were making commitments under that premise, those loans probably haven’t closed yet anyway.

Alexander Twerdahl: Got it. And then just last one for me just remaining outlook for the Springstone wind down in terms of charge-offs. Has that portfolio gets lower, should charge-offs go down, do you think this day in that $2.5 million to $3 million a quarter range they have been for the last year or so?

Scott Kingsley: I think we probably expect a couple more quarters than similar to what we incurred in the fourth quarter. But you are right, as the asset numbers go down, hopefully, the amount of things that we end up charging off keeps coming down with it. Needless to say, you are at the back end or at the tail end of that portfolio. So people that have not extinguished their instruments, are probably have some additional credit constraints that maybe some of our broad section customers do not have. So we think by the time we get to the end of the year that will be a subject matter. We are not spending a lot of time talking about anyways.

Alexander Twerdahl: Great. Thanks for taking my questions.

John Watt: Thanks, Alex.

Operator: Thank you. And I am not showing any further questions at this time. I will turn the call back over to Mr. John Watt for closing remarks.

John Watt: Thank you, Norma, and thank you all for your interest in NBT and we appreciate the opportunity to talk about our story in 2023, 4Q and going forward. Look forward to having the same opportunity in April. Please all have a good day. Thanks.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

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Q4 2023

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