NBT Bancorp Inc

NASDAQ:NBTB

Earnings Call Transcript 2023-Q1

[Operator]

Good day, everyone. Welcome to the NBT Bancorp’s First Quarter 2023 Financial Results Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC’s Regulation FD. Corresponding presentation slides can be found on the company’s website at nbtbancorp.com. Before the call begins, NBT’s management would like to remind listeners that as noted on Slide 2, today’s presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today’s presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. As a reminder, this call is being recorded.

I would now like to turn the conference over to NBT Bancorp President and CEO, John H. Watt, Jr. for his opening remarks. Mr. Watt, please begin.

[John H. Watt]

Thank you, Bella. Good morning and thank you all for participating in our earnings call covering NBT Bancorp’s first quarter 2023 results. Joining me today are NBT’s Chief Financial Officer, Scott Kingsley; our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Ondesko. In a volatile macro environment, we are pleased with our operating results for the first Q of 2023, including earnings per share of $0.88, return on average assets of 1.3% and return on average tangible common equity of 17.2%, excluding merger expenses and securities losses.

We drove 5% annualized loan growth with our commercial banking, business banking, residential solar and indirect auto businesses, all contributing. In the markets we serve it is clear to us that our customers are successfully navigating the challenging operating environment, and we are on the ground helping them every day. Looking forward loan pipelines across the platform are active, but are moderating. Credit quality remains strong across our commercial and consumer businesses. Non-performing assets are at all time lows.

We’re happy to report today that both total deposits and core deposits grew in Q1 driven in part by seasonal growth of municipal deposits. Scott will talk more about this growth and about the diversity and granularity of our deposit base that is the hallmark of our franchise. In addition, we enjoy access to significant and diverse liquidity sources, and our capital levels are strong. We have provided detail on the accompanying slides. Our net interest margin did experience pressure in the first quarter due to re-pricing actions that positioned NBT to stay competitive in our markets. With that said, relative to our peer group and the broad market are cycled to date deposit beta as of the end of March rose to a modest 12%.

The work to support our customers in connection with the multi-year ramp up of the New York chip corridor continues. In Central New York, Micron is moving swiftly to complete the planning necessary to bring its fab plant out of the ground. In the Mohawk Valley, Wolfspeed has commenced work on the addition to its fab plant to support new contracts with Jaguar and Mercedes-Benz for chips in EV vehicles. The economic growth up and down the chip corridor will continue to build over the next five years and beyond, and NBT is uniquely positioned to support that growth.

During the quarter, we continue to execute on our long-term growth plans, and in particular, we are making progress towards our planned acquisition of Salisbury Bancorp. On April 12th, Salisbury shareholders voted to approve the merger with NBT. This is a significant and positive milestone. As we announced in December, we expect this transaction to close late in the second quarter subject of course to regulatory approval. This month NBT was named one of Forbes Best Banks for 2023. Of the U.S. banks recognized by Forbes, NBT has the highest-ranked bank based in New York State. During volatile times, our team excels and this designation is affirmation of our efforts. So NBT is [indiscernible]. Historically, our company has performed well in difficult periods in our economy. The team is positioned to do the same in 2023.

Scott, I’ll turn over to you now to speak to in greater detail about our financial performance in the first quarter. And following Scott’s remarks, we will take your questions.

[Scott Kingsley, Chief Financial Officer]

Thank you, John and good morning. Turning to the results overview page of our earnings presentation, our first quarter GAAP earnings per share was $0.78 and $0.88 per share excluding $0.10 per share of combined acquisition expenses and securities losses. Excluding the impact of acquisition expenses and securities losses, first quarter results were $0.02 a share higher than the linked fourth quarter and $0.03 a share below the first quarter of last year.

The 18% improvement in net interest income from the prior year first quarter was the result of solid organic loan growth and higher asset yields from the continued increases in the Fed funds rate. Our net interest margin in the first quarter of 2023 was 3.55%, which was up 60 basis points from the first quarter of 2022. We recorded a loan loss provision expense of $3.9 million in the first quarter compared to $600,000 of provision in the first quarter of 2022 or $0.06 per share difference. Our reserve coverage stood at 1.21% of loans at March 31 compared to 1.24% at December 31, 2022 and 1.18% at the end of March of last year.

The next page in the deck shows trends in outstanding loans. Total loans were up $114 million for the quarter or 1.4% and included growth in both our consumer and commercial portfolios. Loan yields were up 28 basis points from the fourth quarter of 2022, reflective of higher yields on our variable rate portfolios as well as higher new volume rates. Our total loan portfolio of $8.26 billion remains very well diversified and is evenly balanced between consumer and commercial outstandings.

Total deposits of $9.68 billion were up $185 million from the linked fourth quarter, but were down 7.5% from the end of the first quarter of 2022, which was the high point for us. The decrease in deposits from last year’s first quarter was primarily concentrated in larger more rate-sensitive customers. In many cases, those customers opted to move a portion of their excess liquidity into higher yielding off-balance sheet money market or short-term treasury instruments, many of which are managed by NBT. Our retention of core operating relationships has remained very high and we continued to successfully add new relationships in the first quarter. Although deposit balances have declined from early 2022, they are still 23% higher than the pre-pandemic first quarter of 2020.

During the fourth quarter of last year, we shifted from an excess liquidity position to a net overnight borrowing position, which continued into the first quarter of this year. Our quarterly cost of total deposits increased to 47 basis points in Q1 compared to 17 basis points in the linked fourth quarter. Our total cost of funds increased from 37 basis points in the linked fourth quarter to 75 basis points in the first quarter of this year. In addition, our total cost of deposits for the month of March were 62 basis points and total cost of funds were up to 88 basis points.

We have also added a summary of our deposit mix by type, which illustrates the diversification and granularity of our customer base. In addition, in the appendix to the presentation, we have provided a table of our available funding sources compared to estimated uninsured and uncollateralized deposits, which provides a coverage ratio of 149% at quarter end.

The next slide looks at the detailed changes in our net interest income and margin. First quarter net interest income was $4.7 million below the linked fourth quarter results with a third of that decline related to two less days in the quarter and the remaining two-thirds reflective of increases in funding cost moving up faster than improvements in earning asset yields. Although we believe our granular deposit funding profile remains a core strength, we would expect continued pressure on net interest margin results for at least the next couple of quarters. Our cycle-to-date deposit beta through the end of March has been 12% with total funding beta of 13%. Retaining and growing core deposits will continue to be a critical element of our ability to manage net interest margin results.

The trends in non-interest income are summarized on the next page. Excluding securities losses, our fee income was up 6% from the linked fourth quarter to $36.4 million and was $6 million lower than the first quarter of 2022. Our wealth management insurance and retirement plan administration business experienced seasonal growth in revenue generation from the fourth quarter. Card services income was consistent with the linked fourth quarter, but declined $3.9 million from the first quarter of 2022, driven by the bank being subject to the debit interchange provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of last year.

Turning now to non-interest expense. Our total operating expenses were $78.7 million for the quarter, which was $6.4 million or 9.2% above the first quarter of 2022 excluding merger-related expenses in the first quarter of this year. Total operating expenses were consistent with the linked fourth quarter of last year. Salaries and employee benefit costs of $48.2 million were 1.9% higher than the linked fourth quarter due to seasonally higher payroll taxes, stock-based compensation expense and merit pay increases, which were effective in March. We’d expect core operating expenses to be relatively consistent over the next several quarters as each quarter of 2023 has the same number of payroll days. We expect to fill many of our open positions in support of our customer engagement and growth objectives subsequent to the closing of our pending merger with Salisbury Bancorp.

On the next slide, we provide an overview of key asset quality metrics. A walk forward of our loan loss reserve changes is also available in the appendix to the presentation. As I previously mentioned net charge-offs were 19 basis points in the first quarter of 2023 compared to 18 basis points in the prior quarter. In the selected financial data summary is provided within the earnings release, we have summarized the components of quarterly net charge-offs by line of business. Consistent with the previous four quarters, first quarter net charge-offs were concentrated in our other unsecured consumer portfolios, which are in a planned run-off status. Both NPLs and NPAs declined again this quarter. Our allowance for loan losses to total non-performing loans reached 539% at the end of the first quarter.

As I wrap up the prepared remarks, some closing thoughts. We entered 2023 expecting to experience incremental pressure on funding costs, which started in the fourth quarter of last year. The additional market volatility and uncertainty that arose in early March accelerated those pressures and has continued. Positive results from our recurring fee income lines, stable credit quality outcomes and diligent operating expense management allowed us to continue to report solid fundamental results in the first quarter despite lower levels of net interest income. Our capital accumulation results over the past several quarters continued to put us in an enviable position as we consider growth opportunities for the remainder of 2023 and beyond.

With that, we’re happy to answer any questions you may have at this time. Bella?

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of Alex Twerdahl of Piper Sandler & Co. Yes, please go ahead.

[John H. Watt]

Good morning, Alex.

[Alex Twerdahl, Piper Sandler & Co]

First off, I was just wondering if you could just give us a little commentary on what NBTs experience, in your various markets were to some of the reaction or the reaction to some of the events in turmoil in the banking industry in the middle of March.

[John H. Watt]

Happy to talk about that. As you see in the disclosures here, the customer base here is broad, diverse and granular. And the focus on 250 and above for most of those customers was not all that relevant. Average deposit account size here obviously relatively modest, which is something that is a hallmark of our franchise, I might add. So the customers we did talk to were larger, rate sensitive, concerned about ensuring they were achieving the appropriate yield on their funds. And all by the way a question or two about the environment in which we were operating in the week during those two bank failures, but generally speaking pretty stable. The inbound that we received was very supportive.

Several of the customers I got on the Zoom with thanked me and noted that if they were customers at large money setter banks, they wouldn’t be on the Zoom with the CEO of the bank. And they valued that, and that’s our value proposition, right? Those relationships we have across that customer base. So things obviously have settled down. And as I suggested in my comments, we’re on offense here. We often, as you know, Alex, take advantage in periods of disruption, plenty of capital here, plenty of ability to step into a vacuum that’s created during that disruption. And we’re looking at opportunities to do that.

[Alex Twerdahl, Piper Sandler & Co]

Great. That’s helpful. I want to ask also for your comments on thoughts around credit quality, and there’s been a lot of concern nationally about office exposure. If you could give us what your office exposure is and also talk about why some of your markets might be different from some of the areas that are maybe of more concern.

[John H. Watt]

Well, I think, Scott referenced a disclosure in our slides on office, so let’s just knock that right off. We’re in tertiary markets, right? The return to the office has not been a drama in many of those cities. It occurred as soon as the vaccine was introduced broadly. So we don’t detect any concern around a very regionally diversified portfolio of office in tertiary markets. The tenants are for the most part suburban medical and professional tenants, and the average loan size, they’re 2.2 million. So we think we have that well managed and we’ve conducted stress tests there recently, and we feel good about their output. Otherwise the portfolio is pretty diversified across many different asset classes with multi-family being the largest and all by the way the demand for housing in these markets still very strong. So we’re feeling pretty good about our exposure across multi-family. Residential construction is something that we think about in connection with the chip corridor. We’ll see how that plays out in the future, but we have our eye on that. And finally, hospitality has been pretty strong for us as well. So right now the sponsors we do business with are strong, diversified and we do not detect any material deterioration maybe around the edges a little bit of concern with some of the markets we’re in, but not material at all.

[Scott Kingsley, Chief Financial Officer]

And, Alex, it’s Scott. I’ll just add that you know our markets pretty well from Portland, Maine to Southern New Hampshire back into the Albany’s and Syracuse and Binghamton’s of the world, just not a lot of single tenant, large downtown office only structures in most of those cities. So, for us I think it’s something that’s very controllable.

[Alex Twerdahl, Piper Sandler & Co]

Great. And then just to follow up on credit, your charge-offs have been sort of running mid-teens, I guess, over the last couple of years, and that’s a big reduction from where they were pre-pandemic in the kind of the 35 to 40 basis point level. Do you think that charge-offs just over time are going to trend back towards that 35 to 40 basis point level? Or what are your thoughts on "normalization" of charge-off levels given your various portfolios?

[Scott Kingsley, Chief Financial Officer]

Yes, it’s a great question, Alex. So I would frame it this way that you’re right, our charge-offs have been very much concentrated in our other consumer lending portfolios, our long-term relationship with Springstone Financial, LendingClub. Those portfolios are in a net runoff position. So I think what you’ll see over time is as those run down, you’ll just see a lower level of charge-offs over the next year, year and a half. But to your point, will other lines of business such as indirect auto start to move back towards historical numbers, really good historical numbers but will they move back from the levels we’ve been experiencing for the last two and a half years, which have been in the single-digit from a charge off standpoint? I think they probably do over time. But again, I think that for us that is so much – so much of that picture is casted by employment characteristics. So we’re probably most sensitive to employment. One, how we reserve for these things, and two, just how we experience losses.

[Alex Twerdahl, Piper Sandler & Co]

Great. Thanks for taking my questions.

[Scott Kingsley, Chief Financial Officer]

Thank you, Alex.

[Operator]

[Operator Instructions] Your next question comes for the line of Steve Moss of Raymond James. Your line is now open.

[Steve Moss, Raymond James]

Good morning.

[John H. Watt]

Hi, good morning, Steve.

[Scott Kingsley, Chief Financial Officer]

Good morning.

[Steve Moss, Raymond James]

Maybe just start off on loan growth here. You still had good growth in the pace of resi solar here this quarter. Just kind of curious as to where that may level off or any updated thoughts around there. And I hear you guys in terms of long growth moderating. Just kind of where are you seeing pockets of strength and pockets of weakness?

[John H. Watt]

Sure. Let me talk about our residential solar first. I think we mentioned in the last call that we’ve reached a level that from a concentration perspective on our balance sheet that has caused us to look and say, how do we diversify our relationship here with Sungage to continue to help them originate, but to bring other investors into the picture and allow us to earn servicing income as a function of that. And that migration to that model is underway. There’ll be a little bit more growth in the next quarter I think in that portfolio and then level off. And by that time several of those investors, which have expressed interest in our under negotiation right now, could be at the table and we’ll assume a servicing role and that’ll add to our fee income, which is a part of our long-term plan here.

With respect to other growth, inside the chip corridor we’ve seen activity in multi-family in Utica, New York, for instance, over the weekend we approved a substantial multi-family project that would not even get on the drawing board if not for Wolfspeed and for the large hospital development going on in downtown Utica. So that’s promising. I would expect more of that in Central New York. In New England generally do we see a moderation of the number of opportunities to finance multi-family? We do. And for all the obvious reasons, borrowing costs, inflation, labor costs, all of those things have caused smart sponsors that we do business with to be thoughtful about how they want to achieve a return. So we’ve got a big focus on the C&I side right now and particularly in New England, a marketing effort that is very targeted and we’re moving quickly there. With that said, last year loan growth was for us well above the median. And I think this year, we should think about it more in the mid-single digits, which has been our history in a normalized period.

[Steve Moss, Raymond James]

And then on the margin here, Scott I hear you in terms of the way our funding costs were for the month of March, just kind of curious kind of how are you thinking about that pace of decline in the margin here, just given a much different environment?

[Scott Kingsley, Chief Financial Officer]

So Steve, I would kind of frame it this way that needless to say, our net interest margin was higher in January than it was in March and that differential was on the funding cost side. We are picking up a little bit of earning asset yield as we re-price new volume or replacement volume that hits the balance sheet. The Fed funds rate changes and our commercial variable rate portfolio gave us a little bit of push in the first quarter, but not a ton whether we get another one here next week. So, we get a little bit of offset to that.

I will kind of frame it this way that if our cost of funds for the month of March got 88 [ph], probably not unexpected that during the quarter, they get to 1% for the second quarter and then the question is, how much of that can we fight-off with asset yield improvement. So that’s the real question for us. I think new assets are going on to the books at the right yields across all of our portfolios. We are not today reinvesting cash flows into the investment portfolio. So, we’re taking off somewhere between $15 million to $16 million a month of cash flows on that side. We’re using that as offset to short-term borrowings today. There are yields that are respectable in the investment portfolio. I think we’ve just tried to leave our excess liquidity available for loan growth, because again I think we’re still seeing – again to John’s point mid-single-digit opportunities, which are fine for NBT.

[Steve Moss, Raymond James]

Okay. That’s helpful. And maybe just in terms of also thinking about re-pricing on the loan side, it’s 20% to 25% of loans are variable but just kind of curious, what’s the pace of fixed loans re-pricing and just kind of how do we think about that dynamic here going forward?

[Scott Kingsley, Chief Financial Officer]

I think what we’ve been using Steve across our portfolios because remembering that outside of commercial that does have a proportion of loans that are adjustable are variable, most of the rest of our loan portfolios are fixed. So residential mortgages largely fixed, indirect auto was largely fixed, solar residential is mostly fixed. So from that perspective, I think we think about the total amount of our assets that re-price over a one-year period to be in the neighborhood of $2 billion of change. So in addition to the variable rate portfolio moving with the funds rates, that is that opportunity in terms of re-pricing.

Have cash flows slowed down in almost all of our portfolios, they have. There’s not a huge line of people forming right now to pay off their 3.25% mortgage. And with that in mind, our expectations of where cash flows has definitely slowed down. Does that NIM contribute to quite frankly, a little bit slower runoff in the loan portfolio on a legacy basis, which means growth might be a touch higher, probably does. But that’s kind of how we think about it. I think for us to – we have a small portion of our funding profile that is essentially wholesale funding, but the difference in cost of funds in the wholesale market right now given all the anxiety in the market, it’s just so much more pronounced in the natural inflection we’re getting in our deposit profile.

[Steve Moss, Raymond James]

Okay. And then one last one in terms of just on office here. Just wondering if you guys have any chance either the LTVs or debt service coverage on the office portfolio?

[Scott Kingsley, Chief Financial Officer]

Steve, we can get that to you offline. We’ve done some very detailed reviews in that portfolio. We probably haven’t done a 100% portfolio review, but we can get you those numbers.

[Steve Moss, Raymond James]

All right. I appreciate that. Thank you very much.

[Scott Kingsley, Chief Financial Officer]

Thanks, Steve. Appreciate the questions.

[Operator]

And your next question comes from the line of Chris O’Connell with KBW. Your line is now open.

[Chris O’Connell, KBW]

Good morning.

[Scott Kingsley, Chief Financial Officer]

Good morning, Chris.

[Chris O’Connell, KBW]

I was hoping to follow-up on the securities portfolio. Appreciate the color on the cash flows upcoming for the remainder of 2023. I was hoping you guys could provide what the duration was for the AFS and HTM portfolios?

[John H. Watt]

So Chris, for us across all the portfolios weighted average life duration in around five years.

[Chris O’Connell, KBW]

Great. And I was wondering if you guys had good start NIM for March.

[Scott Kingsley, Chief Financial Officer]

Month of March in the 3.45% [ph] range.

[Chris O’Connell, KBW]

Okay, great. And then you guys mentioned I think expenses would be flat, give or take on an organic basis for the remainder of the year, was that just compensation expense? Or is that total overall expenses?

[Scott Kingsley, Chief Financial Officer]

So, I think it is overall, and here’s how I would frame this Chris. First and foremost, obviously, as John mentioned, we’re preparing ourselves for hopefully getting regulatory approval and getting the pending Salisbury transaction completed and closed. So none of my comments around that include anything relative to contribution from Salisbury and any of those line items. But on a core basis, the first quarter carried slightly larger payroll tax related expenses, some equity compensation expense. And what I would call the first third of our merit change was processed in the first quarter.

So going into the second, third and fourth quarters, we’d be thinking about the second two-thirds of that merit change, a slightly lower level of payroll tax contribution and unusually the number of payroll days in every quarter in 2023 are actually the same. So, I think as we think about some of the seasonal costs that we incur in winter months as a bank based in the Northeast, some of those go down in the next few quarters, but some of our activity based costs relative to customer engagement activities and charitable contributions and some of those things tend to be a little bit higher in the quote in the second half of the year, but generally speaking, I think, we think the first quarter is a proxy of our core run rate before Salisbury.

[Chris O’Connell, KBW]

Got it. That’s helpful. And on this Salisbury deal close, what do you now estimate again this environment the impact will be on the net interest margin and is there any other items or details around the merger close, just updated expectations given the change in environment, meaning any type of balance sheet actions or anything different that you’re kind of expecting with the merger close?

[Scott Kingsley, Chief Financial Officer]

Yes. So Chris, our underlying assumptions that we used when we announced the transaction in December are very, very similar to how we’re feeling about it today. Have there been modest changes in interest rate margins in certain asset classes, for sure. Has core deposit intangible, probably a little bit higher today than what we would have estimated back in October when we were modeling, probably a little bit. But generally speaking in terms of proportional accretion, very similar to what we announced in December.

In terms of balance sheet actions, as we’re working through transition with the Salisbury folks, we’ve been talking about those if there were certain things from an opportunity standpoint. Remember we’re marking their entirety of their balance sheet to fair value for purchase accounting purposes. So if there’s something in that in certain lines of their securities portfolios or elsewhere that we don’t think has long-term benefit, we’ve been talking about that. But generally speaking, we like the assets and liabilities [indiscernible].

[Chris O’Connell, KBW]

Got it. Great. And one last one from me, for BOLI [ph] fees this quarter is that a good run rate or is there anything kind of unusual picking that up this quarter relative to the prior?

[Scott Kingsley, Chief Financial Officer]

Yes. We probably had a couple $100,000 of death-related benefits in the quarter.

[Chris O’Connell, KBW]

Great. That’s all I had. Thanks for taking my questions.

[John H. Watt]

Thanks, Chris.

[Operator]

[Operator Instructions] Your next question comes from the line of Matt Breese of Stephens Inc. Your line is now open.

[Matt Breese, Stephens Inc.]

Good morning.

[John H. Watt]

Hey, good morning, Matt.

[Scott Kingsley, Chief Financial Officer]

Good Morning, Matt.

[Matt Breese, Stephens Inc.]

Sorry, if I missed this. Could you give us some sense for projections on overall loan growth through year-end?

[Scott Kingsley, Chief Financial Officer]

Yes, I’ll take that one and John, feel free to chime-in, but so the 5.5% annualized that we experienced in the first quarter had a contribution from Solar Residential, that’s probably a slight amount higher than we would expect for the balance of the year. But do I still think we’re in sort of that 3.5% to 5.5% range on an overall opportunities basis for the year? Yes, I do.

[Matt Breese, Stephens Inc.]

Okay. And then, on page five, you show new origination yields across commercial consumer and the resi categories. Can you talk a little bit about what kind of impact that’s having on loan growth? Is there a ratio of projects and deals that you say yes and no to now versus, how has that changed versus 12 to 18 months ago? I’m just wondering, as rates have moved higher, if there’s a change in what you’re underwriting and how often you’re saying now these days.

[John H. Watt]

So let me talk about that. On the commercial side, every deal is custom, right? So the negotiation is one-on-one and relates to the total relationship and the length of that relationship. So certainly our relationship managers go into it with guidelines on return and yield that are appropriate under the circumstances. And we looked at the overall profitability of each opportunity. What I’ll say is on with respect to CRE in particular, the sponsors are being more thoughtful right now and they’re like us, making sure they’re allocating their capital and thinking about their returns in the appropriate way. So the volume of those transactions is, or discussions is probably lower.

On the consumer side of the house, every week we meet and set the price parameters for each of those loan products. And we’re pretty rigorous around that. And that comes from sampling what’s going on with the competition and also understanding what our cost of funds is and what the yield to us should be given that cost of funds. So it’s a pretty dynamic and rigorous discussion on the consumer side every week. Are we turning away lots of deals because the competitors are coming in with substantially lower pricing? I’d say no. And I think there is a degree of rationalization that we’ve heard about now in the last couple of months that has taken hold.

[Matt Breese, Stephens Inc.]

Very helpful.

[Scott Kingsley, Chief Financial Officer]

Matt, I would add to that, that needless to say, in this environment where you’re paying a significant amount more attention to core funding opportunities, the lending that bring core funding opportunities naturally to the table with them are probably a little bit more attractive. So if that’s C&I, on the commercial side, if that’s residential mortgage typically brings a customer relationship on the funding side, certain other lines of business, the chase for core funding with that same customer is just a little bit harder. So I would say that that’s not new news. We’ve probably had that bias for a while, but it’s probably a bit more accentuated right now.

[Matt Breese, Stephens Inc.]

Understood. Okay. And then for your own commercial real estate loans that are coming up for renewal now, from 2018, 2019 how are debt service coverage ratios handling higher rates? How are LTVs reacting to higher cap rates? Have you found that rent increases and NOI increases have kind of buffered any sort of blow here or maybe just give us, some idea for what’s coming up for renewal now. Are the underwriting characteristics as strong as they were back in 2018, 2019?

[Scott Kingsley, Chief Financial Officer]

So Matt, so far so good, right? The other thing that’s obviously happened if you have to remember in 2018 and 2019, so the stuff that’s sort of reaching either the five year points or, so now, most of those were underwritten at rates that were not the pandemic low rates. And in certain cases, as you could probably imagine, even some of those, that were written at low rates after the Fed funds rates dropped to zero before the, start of the pandemic. The customer is sitting a lot of times with a fixed swap protection in some of those instruments. So from a customer protection standpoint, a lot of our customers are in really good shape with that. The other thing I’ll make an observation at is yes, that there, in most of our markets, I think cap rates are probably going up a little bit.

And that’s kind of a slow walk. It’s not something that got pronounced and posted immediately in every one of our markets. But remember, the customer is, had a period of time where they’ve been servicing their obligations that have had very low interest rates, so they’ve made meaningful impact on their carry debt, from an overall perspective. So again, I think for us from a blended standpoint, it’s a very positive story. And we don’t have customers that we have on a watch list today because we say it is the valuation of their properties unlikely to be carrying a re-pricing activity.

[Matt Breese, Stephens Inc.]

Understood. Okay. Last one for me, just given capital levels and the stock and just opposed to that with credit quality, any appetite on the buyback front more so than what we’ve seen historically, which is just, more or less kind of trimming the share count here and there.

[John H. Watt]

Well, obviously we always examine what our capital allocation plans are. And remember now we’re in the middle of an acquisition process and we have to move through that process in a way that is consistent with representations that we’ve made to the constituents here, including our regulator.

So in the short run, I don’t think that we’re likely to change that approach once we are able to get to the finish line. And once these constructive discussions we’ve been having with our regulator are concluded and we get the deal closed, we’ll take another look and see what’s appropriate from a capital allocation perspective going forward.

[Matt Breese, Stephens Inc.]

Great. That’s all I had. I’ll leave it there. Thank you.

[Scott Kingsley, Chief Financial Officer]

Thank you, Matt.

[John H. Watt]

Thanks, Matt.

[Operator]

I’m not showing any further questions. I will now turn the call back to John Watt for his closing remarks.

[John H. Watt]

Thank you, Bella and thank you all for taking the time to hear the first quarter story at NBT Bancorp. We’re proud of it, and we’re looking forward to being on offense for the rest of the year doing that in a smart way, in a way that is favorable for all of the constituents of NBT, including our shareholders. So again, thank you for participating. Look forward to talking to you in the next quarter.

[Scott Kingsley, Chief Financial Officer]

Thanks everyone.

[Operator]

Thank you, Mr. Watt. This concludes our program. You may disconnect. Have a great day.