This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk23: Good day, everyone. Welcome to the conference call covering NBT Bancorp's fourth quarter and full year 2022 financial results. This call is being recorded and 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 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, 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. And 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.
spk09: Thank you, Chris, and good morning, and thank you for joining our earnings call covering NBT Bancorp's fourth quarter and full year 2022 results. Joining me today are NBP's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Ondesco. We achieved superior operating results for the full year 2022 defined by strong loan growth in connection with our strategy to build scale and create higher operating leverage. We're very pleased to report operating earnings per share of 86 cents for the quarter, and $3.55 for the year, excluding acquisition-related expenses and securities losses. Return on average assets was approximately 1.3%, with return on tangible common equity for the year at 16.9%. In a year underscored by volatile interest rate movements and unfavorable equity and fixed income market returns, We're pleased that our operating results drove total shareholder returns of over 15% in 2022. Also in line with our strategies around scale building, we were very pleased to announce an agreement to acquire Salisbury Bancorp in December. This all stock transaction is expected to close in the second quarter of 2023. pending the required regulatory and Salisbury shareholder approvals. Loan growth was 10.2% with our commercial and residential solar lending businesses finishing strong in the fourth quarter. Credit quality remained strong throughout the year with non-performing loans down 4% in the fourth quarter. In 2022, our customers continued to embrace digital services with a 94% cumulative increase in consumer digital adoption since the start of 2020. Across our markets, our commercial and business banking customers are active, and their sentiment is generally optimistic. Projects funded by the 2021 infrastructure bill are moving ahead in upstate New York, and our customers are bidding and winning their fair share. The planning work associated with the Micron chip fab plant build out near Syracuse has begun. And in Utica, New York, Wolfspeed recently announced a new large chip fabrication contract with Mercedes. NBT is preparing on many fronts to support our customers and communities across the upstate New York chip corridor over the next five years. Yesterday, our Board approved a 30-cent dividend payable on March 15. In 2022, it's notable that we marked 10 consecutive years of annual dividend increases and continued our commitment to providing consistent and favorable long-term returns for our shareholders. So I'll conclude my remarks by emphasizing that it was the talented and dedicated team at NVT who made our 2022 results Possible. We could not be more optimistic about how well that team has positioned us to enter 2023. With that said, I'll turn the meeting over to Scott, who will walk you through the detail of our last quarter and the prior year. Scott, turn it over to you.
spk18: Thank you, John, and good morning, everyone. Turning to the results overview page for our earnings presentation, our fourth quarter earnings per share were 84 cents, and 86 cents per share, excluding the 2 cents per share of acquisition expenses we incurred in the quarter related to our previously announced combination with Salisbury Bancorp. Fourth quarter operating results were consistent with the 86 cents a share reported in the fourth quarter of 2021 and 4 cents a share lower than the late third quarter of 2022. These results were achieved despite a $7.5 million decline in PPP income recognition compared to the fourth quarter of last year, or 13 cents a share. The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth, incremental deployment of a portion of our excess liquidity into investment securities in the first half of the year, and higher asset yields from the continued increases in the Federal Reserve's targeted Fed funds rate. We recorded a loan loss provision expense of $7.7 million in the fourth quarter, compared to $3.1 million expense in the fourth quarter of 2021, or an $0.08 per share difference. Fourth quarter 2022's loan loss provision was also $3.2 million, or $0.06 a share, higher than the $4.5 million provision recorded in the late third quarter. Net charge-offs in the fourth quarter were $3.7 million, or 18 basis points of loans, compared to 22 basis points of loans in the fourth quarter of 2021 and seven basis points of net charge-offs in the late third quarter. Our reserve coverage increased slightly to 1.24% of loans from 1.22% at the end of September, which provided for loan growth. The next page shows trends in outstanding loans. Total loans were up $245 million for the quarter and included growth in both our consumer and commercial portfolios. Loan yields were up 38 basis points from the third quarter of 2022, reflective of higher yields on our variable rate portfolios as well as new higher volume rates. Total loan portfolio of $8.15 billion remains very well diversified and is evenly balanced between consumer and commercial outstandings. Total deposits were down $423 million from the end of the third quarter and ended the year $739 million below the end of 2021, or 7.2% lower. The decrease in deposits was primarily concentrated in certain larger, more rate-sensitive accounts. The effects of tighter monetary policy, inflation, and higher rate alternatives, including a laddered treasury security strategy deployed by our wealth management group for our own customers, continue to weigh on balances. Even though deposit balances declined from 2021, year-end 2022 deposits are still 25% higher than the pre-pandemic end of 2019. During the fourth quarter, we shifted from an excess liquidity position to a net overnight borrowing position. Our quarterly cost of total deposits increased to 17 basis points compared to nine basis points in the late third quarter. Interest-bearing deposits moved up from 14 basis points in the third quarter to 27 in the fourth quarter, and our total cost of funds increased 19 basis points from 18 basis points in the third quarter to 37 basis points in the fourth quarter. The next slide looks at detailed changes in our net interest income and margin. Net interest income increased $14.7 million as compared to the fourth quarter of last year and was up $5.4 million from the third quarter of 2022 reflective of higher yields on earning assets. Reported fourth quarter net interest margin was 3.68%, up 17 basis points from the linked third quarter and 60 basis points higher than the fourth quarter of 2021. With interest rates expected to continue to modically rise in the near term, the yields on our variable rate earning assets are expected to continue to move higher over the next few quarters. We also expect to reinvest cash flows from our interest earning assets at levels above our current blended portfolio yields. Although we believe our deposit funding profile remains a core strength, we would expect increased levels of deposit beta in 2023. Going forward, retaining and growing deposits will continue to be a critical element of our ability to sustain the significant improvements we achieved in net interest margin during 2022. The trends in non-interest income are summarized on the next page. Excluding security gains and losses, our fee income was down 17% from the before quarter to $4.3 million from the late third quarter. Our retirement plan administration and wealth management businesses' revenue decreased a combined $1.2 million, reflective of challenging market conditions as well as certain seasonally higher revenues in the third quarter. Similarly, fourth quarter revenues in our insurance agency are typically lower than the first three quarters of the year and were $450,000 below the late third quarter. In 2022, on a four-year basis, the company's retirement plan administration business recognized $2.5 million of service revenues related to statutory plan document restatement requirements that generally recur on a six-year cycle. Card services income decreased $3.9 million in the fourth quarter of 2021, driven by the bank being subject to the provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of 2022, which caps our per-transaction compensatory opportunity for debit card interchange activity. Lower levels of card utilization and changes in transactional mix resulted in lower card services income in the fourth quarter compared to the late third quarter. In addition, we continue to experience comparatively lower commercial lending fee opportunities in this rising interest rate environment. Turning now to non-interest expense, our total operating expenses were $79.5 million for the quarter, which was $4.4 million, or 5.9% above the fourth quarter of 2021, and $2.8 million, or 3.7% higher than the late third quarter, and included $1 million of merger-related expenses incurred during the quarter. Salaries and employee benefit costs of $47.2 million were 2.3% lower than the linked third quarter, reflective of one less payroll day in the quarter and more favorable experience than certain of our benefit plans. The quarter included some higher seasonal costs, including some external services for several tactical and strategic initiatives. We'd expect core operating expenses to drift modestly upward over the next several quarters, as we continue our efforts to fill open positions in support of our customer engagement and growth objectives. We would also anticipate somewhat higher than historical levels of merit-based compensation increases in early 2023, probably 4% to 5%. In addition to investing in our people, we expect to continue to invest in technology-related applications and tools in order to advance our customer-facing and processing infrastructure. 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 for the presentation. As I previously mentioned, net charge-offs were 18 basis points in the fourth quarter of 2022 compared to seven basis points in the prior quarter. In the selected financial data summary provided with the earnings release, we have summarized the components of our quarterly net charge-offs by line of business. Consistent with previous quarters, fourth quarter net charge-offs were concentrated in our other unsecured consumer portfolio, which are in a planned runoff status. Non-performing loans declined again this quarter. We are continuing to benefit from conservative underwriting that continues to experience higher than historical levels of recovery. As I wrap up my prepared remarks, some closing thoughts. We started 2022 on strong footing and are very pleased with the results we achieved. Improving net interest income, additive results from our diversified fee income line, and favorable credit quality outcomes have more than offset higher levels of non-interest expense, which has allowed for productive gains in operating leverage. Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for 2023 and beyond. With that, we're happy to answer any questions you may have at this time. Chris?
spk23: Thank you, sir. Anyone with a question at this time can press star 1-1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for our questions. And our first question will come from Steve Moss of Raymond James. Your line is open.
spk02: Good morning.
spk14: Good morning, Steve. Morning, Steve. Maybe just start off with loan growth here. You had a good quarter for loan growth, and just kind of curious as to how the pipeline is now versus before. I hear you guys in terms of the ongoing investment in upstate New York supporting business activity, but commercial growth was continuing strong. Just curious as to expectations going forward.
spk09: Appreciate the question. First of all, with respect to economic development in upstate New York, that's a long-term growth opportunity for us. And as I said before, MBT is best when we are playing that long game. Those pipelines are going to build over periods of years, not immediately, although... under the infrastructure funding that's been released recently. Several of our customers have been quite successful in receiving awards to be involved in large infrastructure projects. With respect to the commercial pipeline itself across the seven states, it's healthy. Clearly, we did a lot in the fourth quarter to take a pending pipeline and convert it to close. And there's refilling of the bucket going on, but we feel pretty good about the opportunities that we're given to look at and the diversity of those opportunities. On the consumer side, there's no doubt that the residential mortgage business has slowed down. So loan growth there is more muted and will be in this rate environment for a while. Although on the back half of the year, we'll see whether or not the housing market shifts again. We're watching that very closely. We mentioned our growth in the SunGage lending program, very strong third, fourth quarter. I think Scott also will talk to that subject. We expect that to level off now going into this year as our partner SunGage diversifies its funding sources and it's actively engaged in that. The beauty of that is we'll retain the servicing in all likelihood, and there'll be other investors to hold the asset. So generally speaking, optimistic with those exceptions.
spk14: Okay, that's helpful. And then maybe just on loan pricing, you know, what's the rate on new loans coming on these days and any call you can give there?
spk18: Sure. So sort of holistically or across the board, Steve, new loan production is really above 6% in all of our portfolios. From a pricing standpoint, I think that the discipline in the market around us has been pretty fair as people have started to experience some increase in some of their funding costs or have actually started to experience a little bit less excess liquidity on their balance sheet. I think some of that discipline is even a little bit more pronounced, at least what we're seeing in the market today. So, you know, important for us going forward, you know, from a pricing standpoint to price to the forward curve, I think as most people have probably noted, you know, 2022 probably didn't force that until at least the mid-year point of the year or maybe even later because of the excess liquidity that exists on most bank balance sheets at the time. But I think generally, you know, we're not getting a lot of pushback relative to our pricing proposals that are out there today. And they are certainly at levels of yield that are meaningfully above the blended portfolio that's on the books today.
spk14: Okay. That's helpful. And then maybe just one last one for me. If we get 25 basis points in February and 25 in March, just kind of curious, you know, how you guys are thinking about the margin. I mean, I hear you, there's, you know, some uptick in deposit costs, but just curious how to think about that our next couple of quarters.
spk18: Yeah. Yeah. And, you know, for us, I think we probably would have told you a quarter ago that we would have thought that that would have allowed for a little bit of a tick up in net interest margin expansion possibilities. I think with the drop in funding levels in the fourth quarter, probably a little bit more cautious about that than we were in September. So, yes, I think we'll get improvement relative to variable rate assets with those two moves, and we're anticipating that. You know, the question is, can we still find the logical sources? I think, as probably we pointed out before, I mean, our deposit beta remains very low. We have a very granular deposit base. But to the extent that we've had drops in balances, not drops in relationships, but drops in balances, those have been primarily focused on our largest 150 customers. And I think as, again, most people realize short-term treasury yields at the front end of the curve are in the high fours today. And people with the high treasury acumen, some were helping and others have got there without us, have just found other opportunities in a higher yielding. Steve, to come back around to your question, you know, I think we'd like to believe that NIM stability is a possibility for the first half of the year, but I think that will be incumbent upon us holding our funding sources in place.
spk14: Okay, great. Thank you very much for all the color.
spk18: Appreciate it, Steve. Thanks for the question. Thanks, Steve.
spk23: Thank you. One moment, please, for our next question. And our next question will come from the line of Alex Trudell of Piper Sandler and Company. Your line is open.
spk05: Hey, good morning, guys. First off, you know, just kind of going back to deposits, I was just curious, you know, you sort of talked about what happened this quarter, but do you have any sort of line of sight on sort of expectations for what deposit flows might be over the next couple months?
spk18: So good question. So what we have out there, you know, today, what we're seeing is that, you know, with other opportunities relative for higher yields, there's a little bit of pressure on, again, higher balance accounts. Alex, the general broad cross-section of our deposit base, you know, has not been that influenced by that. Again, level of granularity in our deposit base is a huge advantage. I think relative to where we think competition is going, You know, remembering that everybody has an investment portfolio that is probably a little bit higher than it was pre-pandemic. So cash flows off the investment portfolio will be important sources of net liquidity, not only for us, but probably for everybody. But today, you know, one can't stimulate that because one is probably in a lost position relative to the front end of some of those. So with that in mind, I think there's a little bit more competition, even in our markets, which have historically been very stable, for incremental deposit dollars. So I think that's how we're sort of framing that, Alex. Typically, the first quarter for us is a net inflow quarter on the municipal deposit side. And, you know, I think we think that as much as they have some other choices as well, we'll still benefit from that.
spk05: Okay, that's what I was looking for. Are you able to... QUANTIFY OR GIVE US A LITTLE BIT MORE COLOR ON SORT OF THE FROTHIER, YOU KNOW, SOME OF THE DEPOSITS YOU SAW THIS QUARTER THAT YOU KIND OF ALLUDED TO, YOU KNOW, LIKE SORT OF THE PERCENTAGE OF OVERALL DEPOSITS THAT MIGHT BE IN THAT CATEGORY, WHERE IT WAS LAST QUARTER, WHERE IT IS THIS QUARTER, AND SORT OF WHAT MIGHT STILL BE CONSIDERED, QUOTE, UNQUOTE, AT RISK?
spk18: BOY, I'M SURE YOU'RE GETTING THIS RIGHT, ALEX. you know, higher balance deposits that left the balance sheet typically found a wealth management or a short-term treasury solution that had yields in the four to four and a half range. And again, you know, something like $600 million of our $730 million decline in balances for the year related to customers in our top 150 in terms of outstanding deposit balances. So an enormous concentration of a small group of accounts in fairness. You know, other than that, Alex, I don't know that there's anything else. If your question was sort of geared toward what are other people doing in the market for offerings, you know, I think we're certainly seeing some near-term or some mid-term offerings, whether they be CDs or just high-yield money markets that are approaching 4%. But I think they typically have some other requirements attached to them, you know, relative to achieving those yields.
spk05: Got it. And then just a point of clarification on the expense or on the fees, the $2.5 million that you alluded to that's on a six-year cycle. Is that something that, you know, we're going to see fees go down by $2.5 million in 2023 and then come back in 2028? Or how do we, you know, can you just maybe explain that a little bit better?
spk18: Yeah, sure. So, you know, there are statutory requirements either within the premise of ERISA or other, you know, that force documents to be refreshed on a recurring, typically a five- to six-year cycle. So you'd be exactly right. We had $2.5 million in 2022 that we don't think recurs in 2023. And depending on the statutory changes, requirements to plan legal requirements, is that a 2027 or 2028 event? Probably most likely. It would be more important for that line of business for us the run rate of the fourth quarter is probably more indicative of where we'd expect 2023 to start before any organic growth opportunities that we would be able to capitalize on.
spk05: Okay, so the $2.5 million was kind of earlier in 2022 and 2023, the $10.7 million, that's kind of the right starting point for the retirement plan administration fee line.
spk18: Yeah, that's a fair conclusion, Alex, absolutely. You know, much more concentrated in the first three quarters. I think we sort of finished up that program early in October.
spk05: Okay. And then just a final question for me. I think I saw in the presentation that commercial lines of credit utilization rates have gone down a little bit into the end of the year. I'm just curious, is that a function of customers paying down those lines, or is it a function of increased lines available that just haven't been drawn on yet?
spk09: Well, I think it's a function of a couple factors. Clearly, smart customers with excess liquidity, they're using some of that excess liquidity to pay down their debt. And I think also there are several large, unfunded lines of credit in that portfolio that are accommodations to broad customer relationships that have many other components to them, and they remain unfunded and are likely to stay unfunded. So it's kind of a mixed bag there. And, you know, I think going forward here as excess liquidity moves out of the system, you know, we're likely to see incremental borrowing there that we didn't see in 2022.
spk08: Okay. That's helpful. Thanks for taking my questions.
spk07: Appreciate it, Alex. Thanks, Alex.
spk23: Thank you. And again, If you have a question, please press star 11 on your phone and wait for your name to be announced. As a reminder, to withdraw your questions, please press star 11 again.
spk01: One moment, please, for our next question. Our next question will come from Chris O'Connell of KBW.
spk23: Your line is open.
spk11: Hey, good morning.
spk15: Just following up on the deposit flows question and, you know, having some of the investment portfolio cash flows helping out with loan funding there. Can you guys give us the either monthly or quarterly cash flows that are coming off the investment portfolio?
spk18: Sure. Chris, you know, the large piece of our investment portfolio is mortgage-backed securities. And so those cash flows have slowed down a little bit since rates started to rise. But I still think it's safe to think about $15 to $17 million a month of cash flows off the portfolio. And, you know, and that's given where current rates are. You know, maybe that accelerates again in the second half of the year.
spk15: Okay, got it. And I guess along those lines, Any chance you could quantify some of the commentary around the deposit betas, which, you know, obviously have held in extremely well so far, you know, but you guys are expecting to kind of increase on a go-forward basis just, you know, relative to either last cycle or, I guess, to peers for this cycle?
spk18: Yeah. So, Chris, I would kind of frame it like this. Deposit costs were higher in December than they were in October, and they'll be higher in January than they were in December. And I think generally that marching up effect will happen throughout the quarter. Certainly would not be surprised if deposit costs were up 12 to 15 basis points in the quarter. But the trend line would suggest that that's going to be necessary to hold balances. It's important for us to retain some of those balances. It's really important for us to retain the operating side of those relationships. Excess liquidity can come and go from the balance sheet, but sustaining the operating account is always our first objective in all those cases. So I think that's kind of how we're thinking about it. You know, the alternative for us, and again, we're 92% deposit funded and 8% borrowing funded at the end of the year, and that's the high mark for the last two years. So it's important to know that we have an apparatus for deposit gathering, and we're pretty good at that. and historically, you know, have achieved good growth rates. We get back to more of a normalized cycle, I think we would suspect that we're capable of growing deposits in any rate environment. Will there be a little bit more pressure now with short-term yields? Yeah, maybe a little bit more. But I think that's something that reconciles itself after you get to stability of rate change.
spk15: Okay, great. That's helpful. And on the insurances, you know, financial services line, I believe there's like a little bit of seasonality between third and the fourth quarter versus the fourth and the first quarter of the years. Can you just remind us of, you know, what that seasonality is or what the expectations for that line is going into the first quarter?
spk18: Yeah, absolutely. And, Chris, actually, thanks for asking the question because, you know, there is, you know, it's always good at least once a year to remind people about some of the seasonality. So, As it relates to insurance revenue specifically, the fourth quarter is normally our weakest quarter. Usually the first and the third quarter are stronger, and I think that's really centered around effective dates of the type of insurance that we originate in our agency, whether it's commercial insurance, property casualty on the retail side, or benefits-related stuff. It's not unusual for people to make changes to their plan or have renewal dates that tend to be January 1, July 1 centric in each of those cases. So, you know, again, just back to your question around seasonality, we normally see a one to two cent improvement in insurance and wealth management combined in our first fiscal quarter compared to the linked fourth quarter. However, it's not unusual for us to incur another cent per share of costs on the utilities and maintenance side in the winter, you know, just relative to the geography that we live in. And quite frankly, I think most people remember this, that, you know, we typically incur three to four cents a share in the first quarter associated with elevated payroll tax obligation and some equity compensation that just tends to be front loaded. So past that, from the seasonality standpoint, you know, not anything that's substantial or that sticks out for us. I will make a comment, a little bit quirky, but, you know, 2023 has 65 payroll days in each of the four quarters, which is highly unusual. Normally there's a one or two day fluctuation that goes along with that. So I think in terms of the stability of some of our operating costs should probably be something that's a little bit easier to model next year.
spk15: Okay, great. And then lastly, I mean, credit's held in, you know, super well so far. There doesn't seem to be, you know, a ton of movement in the buckets, you know, for you guys this quarter. But, you know, generally, you know, can you just, you know, give us an outlook on what you guys are seeing in your markets and any kind of areas or causes of concern in either, you know, the commercial or the residential portfolios as you look out into 2023?
spk09: I'll take that one. Thank you. Last week, we completed a comprehensive review of both our commercial and consumer books from a credit risk management perspective. We did that with our board. The year ended at a place that we've never seen in the history of this company in terms of the quality of our credit portfolios. With that said, you know, I would expect as we head into a more normalized environment that there'll be a reversion towards pre-pandemic 2019 levels over time. Certainly not immediately, but over time. And we'll see that initially in the consumer portfolios. We don't see it now, but it'll come. Commercial portfolio, very strong. Business banking portfolio, very strong. I don't think there's a non-performing loan in excess of a million dollars in the total credit book. The sustainability of that will probably revert back to a more normalized non-performing level as well over a longer period of time. We feel good about it now. We don't see cracks. You know, I know others talk about certain segments of the CRE product line, but we're not feeling that now, and we feel pretty good about the LTVs in each one of those asset classes in CRE, so pretty stable there.
spk18: Let me add to that real quick. Our philosophy has been that we will provide a provision for net charge-offs, and we will provide a provision for loan growth. Sometimes that loan growth is in different segments of our portfolio, and that has a higher coverage level in certain portfolios versus others. But I think important to take the takeaway here is, you know, we have not wavered in that at all. So coverage ratios of 1.24%, I think you'll find are probably slightly above our peer group. And we think that's appropriate and judicious, you know, certainly given the, you know, the dynamic of, you know, of the economic conditions that we expect to go forward with.
spk13: Got it. Appreciate the color. Thanks for taking my questions.
spk03: Thank you, Chris. Thanks, Chris.
spk23: Thank you. And one moment, please, for our next question. Our next question will come from the line of Matthew Brees of Stevens, Inc. Your line is open.
spk17: Hi, good morning. I was hoping you could break out the crystal ball on deposits again. I have a follow-up. I guess I was wondering... Do you think the overall mix of non-interest bearing is at risk here? And could we go back to levels we saw pre-COVID or even prior? I mean, just given, I mean, Scott, you talked a little bit about the granularity of the book. Assuming that that continues to be a structural advantage, how granular is it and is it continually at risk from mobile banking offers that we see every day north of 3% or 4%?
spk18: So I would frame it this way, Matt. It's a really good question. And, oh, by the way, our crystal ball is not that clear this morning. But at the same point, I guess what I would say is that we have seen a little bit of migration away from pure non-interest DBA into other alternatives. But it has been typically our customers with a much higher treasury acumen relative to larger businesses with full-time professionals managing their net cash flows. So we've seen a little bit of that. I think in the lion's share, the broad cross-section of our business, a lot of our customers, whether they're retail or small business, just don't have that much excess liquidity where they think that going through the machinations of moving certain of that amount off into alternative instruments, even in the near term, is that prolific. For them, if you've got excess balances of $25,000 or $50,000, You know, what is the net differential? We have some products in our deposit portfolio to address, you know, moving people up over time, tiered-based products. So I think those will be affected. They've historically been affected. I think what you're even seeing is that our customers still have higher than historic levels of pure checking balances, but they're becoming a little bit better at moving those off into money market-type products, even on our own deposit portfolios. So, Matt, I think I'd come back around to say I think on a peer comparison, our granularity of our retail and small business portfolio will be an advantage on the deposit side. I think, like everybody, managing some of the large customer expectations and, in fairness, reminding some of those large customers how low their borrowing rates still are. you know, will be something that will continue to be a challenge for us and a task for us. But truly, I mean, that's about managing relationships, and I think we'll be really effective at that over time.
spk17: Got it. Okay. And then just acknowledging that the loan-to-deposit ratio ticked up, you know, still well below 100%, but at 86%, you know, any – you know, any limitations there you'd put on yourself or any ceiling you'd like us to keep in mind? And at what point does it start to impact your loan growth outlook?
spk09: So let me start there and then Scott will pick it up. I think historically anybody who's followed MBT for a long period of time knows that we have very successfully operated this company pre-pandemic at a loan deposit ratio in the low 90s and we feel comfortable being in that territory. I don't see us getting there very fast, but that's not a place that we're adverse to being at if the loan demand presents itself at the right yield. So we still view it that we got headroom here and loan demand, if strong, we'll keep funding.
spk18: I think about the only thing I would add to that, John, is that Matt and I think we've been pretty transparent about this, and John made some comments on that. We certainly don't expect loan growth in the solar residential portfolio in 2023 to be similar to 2022's results. I think we've talked in the past about where we are today. We think we have a little bit more balance sheet capacity for that type of instrument. We're very happy with that instrument from both a credit performance you know, as well as effective yield performance. It's also a borrower base that has a meaningfully higher than average, you know, FICO score. So we like the borrowing base there. But I will say that, you know, as that business has matured and our partnership with Sungage has matured, getting to more forward flow opportunities for them, warehouse lines of credit that ultimately become securitization, that's where that business is headed. And so the utilization of our balance sheet won't need to be anywhere near as prolific going forward. So I think that gives us a little bit more room relative to that loan-to-deposit ratio. I also should remind people that not only do we think we have a couple hundred million dollars of cash flow coming off our investment portfolio, but the portfolio is $600 to $800 million larger than it had ever been. So over time, that will also be a source of net liquidity for us. May or may not change our loan-to-deposit ratio, depending on how much demand we see on the loan side. But in fairness, lots of other liquidity sources that exist within our world. And now that yields on most lending instruments are six or north, some mix of wholesale funding is not really a bad thing. It's a little bit more expensive than the deposit bank, but not a bad thing.
spk17: Understood. Okay. As you can imagine, you know, this stage in the cycle and everything going on during COVID with, you know, car prices, we're getting more questions on exposure there. Could you just remind us within that dealer finance book, you know, how much is indirect auto versus floor plan lending? And then, you know, kind of stratify the FICO exposures you have.
spk18: Sure, absolutely. You know, so that portfolio that's just under a billion dollars is all indirect auto. We have very, very small amounts of dealer finance, you know, or floor plan financing, you know, just from some really older legacy relations. Legacy less than 20 million dollars. So most of that is indicative of that. In terms of FICO ban for indirect auto, an average FICO above 750. And to your point, the Mannheim Index is still very, very high, very buoyant from historical standards. I think the silver lining to that is we made loans during the last couple of years in indirect auto that were lower than historical yields. which meant that the customer is very quickly working through their pay down of their instrument. So I think from a loan-to-value standpoint, we're not concerned where we are today. There's still a little bit of a backlog relative to vehicle inventory, and especially in our markets that don't enjoy a lot of public transportation, everybody drives to work. So from a commentary standpoint, I stay not concerned about that portfolio and still, you know, being able to manage the customer outcome. Historically, that employment characteristics or unemployment characteristics and the performance of that portfolio have been linked at the hip. So from a productive standpoint, we think that portfolio will still be something that's, you know, meaningfully additive to our net mix all year long.
spk17: Got it. Okay, thank you. Last one for me. Scott, you had mentioned that you expect a slight migration higher on overall expenses in 2023. I was hoping you could just be a bit more specific there. Are we looking at low single digits or mid-single digit expense growth this year versus next?
spk18: Yeah, deal aside. Yeah, if I framed it this way, I would tell you that – You know, the midpoint between our third quarter operating expenses and our fourth quarter operating expenses is probably a really good baseline before we start to talk about merit increases. We expect sort of a late first quarter merit change for our folks in the neighborhood of 4% to 5%. And what we think about that is a combination of merit changes and some compression needs that we have. You know, with people being hired in more recent times at rates maybe a little bit higher than some of their peers, we do have some compression to deal with. I think that's across the board for most enterprises. So we suspect instead of sort of the historical standard of 3% type of inflationary increases, we're a little bit above that going forward. As it relates to the rest of our non-operating base, you know, maybe expect a little bit more utilization of some technology tools on a full scale. a fully incurred basis next year that pushed that up a little bit. But other than that, we're not seeing signs that anything else is really being meaningfully impacted by inflationary price change in our operating base.
spk17: Perfect. I appreciate it. That's all I had. Thanks for taking my question.
spk18: Madam, let me give you one more. Someone just reminded me. Our friends at the FDIC are trying to collect a little bit more on a per-deposit-dollar assessment basis next year. We think that probably costs us $0.04 a share next year in terms of that higher base. And I think this goes without saying, but as a reminder, in the first half of the year, we saw the negative comparison because of the Durbin impact, you know, because obviously that started for us in July. So, you know, $8 million less in debit interchange revenues in the first half of the year is our expectation compared to 2021. Got it. Okay.
spk17: Do you have that? You said $0.04. What is that on the dollar amount or relative to deposits in terms of basis points?
spk18: Yeah, so it's $2.2 million of expected expense. And in my head, that must mean it is two or three basis points.
spk17: Got it. Okay. Thank you, Scott. Thank you, John. I appreciate you taking my questions. Thank you, Matt. Thanks, Matt.
spk23: Thank you. And I'm now not showing any further questions. I will now turn on the call back to John Watt for his closing remarks.
spk09: Thank you, Chris, and thank you all for participating in our fourth quarter and year-end 2022 call. Look forward to catching up with you at the end of the first quarter. Have a great day. Thanks.
spk23: Thank you, Mr. Watt. This concludes our program. You may now disconnect, and have a great day. you Thank you. Thank you. Thank you. Good day, everyone. Welcome to the conference call covering NBT Bancorp's fourth quarter and full year 2022 financial results. This call is being recorded and 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 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, 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. And 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.
spk09: Thank you, Chris, and good morning, and thank you for joining our earnings call covering NBT Bancorp's fourth quarter and full year 2022 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer Annette Burns and our Treasurer Joe Ondesco. We achieved superior operating results for the full year 2022 defined by strong loan growth in connection with our strategy to build scale and create higher operating leverage. We're very pleased to report operating earnings per share of 86 cents for the quarter and $3.55 for the year excluding acquisition-related expenses and securities losses. Return on average assets was approximately 1.3%, with return on tangible common equity for the year at 16.9%. In a year underscored by volatile interest rate movements and unfavorable equity and fixed income market returns, We're pleased that our operating results drove total shareholder returns of over 15% in 2022. Also in line with our strategies around scale building, we were very pleased to announce an agreement to acquire Salisbury Bancorp in December. This all stock transaction is expected to close in the second quarter of 2023. pending the required regulatory and Salisbury shareholder approvals. Loan growth was 10.2% with our commercial and residential solar lending businesses finishing strong in the fourth quarter. Credit quality remained strong throughout the year with non-performing loans down 4% in the fourth quarter. In 2022, our customers continued to embrace digital services with a 94% cumulative increase in consumer digital adoption since the start of 2020. Across our markets, our commercial and business banking customers are active, and their sentiment is generally optimistic. Projects funded by the 2021 infrastructure bill are moving ahead in upstate New York, and our customers are bidding and winning their fair share. The planning work associated with the micron chip fab plant build out near Syracuse has begun. And in Utica, New York, Wolfspeed recently announced a new large chip fabrication contract with Mercedes. NBT is preparing on many fronts to support our customers and communities across the upstate New York chip corridor over the next five years. Yesterday, our Board approved a 30-cent dividend payable on March 15. In 2022, it's notable that we marked 10 consecutive years of annual dividend increases and continued our commitment to providing consistent and favorable long-term returns for our shareholders. So I'll conclude my remarks by emphasizing that it was the talented and dedicated team at NVT who made our 2022 results possible, we could not be more optimistic about how well that team has positioned us to enter 2023. With that said, I'll turn the meeting over to Scott, who will walk you through the detail of our last quarter and the prior year.
spk18: Scott, turn it over to you. Thank you, John, and good morning, everyone. Turning to the results overview page for our earnings presentation, our fourth quarter earnings per share were 84 cents and 86 cents per share, excluding the two cents per share of acquisition expenses we incurred in the quarter related to our previously announced combination with Salisbury Bancorp. Fourth quarter operating results were consistent with the 86 cents a share reported in the fourth quarter of 2021 and four cents a share lower than the late third quarter of 2022. These results were achieved despite a $7.5 million decline in PPP income recognition compared to the fourth quarter of last year, or 13 cents a share. The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth, incremental deployment of a portion of our excess liquidity into investment securities in the first half of the year, and higher asset yields from the continued increases in the Federal Reserve's targeted Fed funds rate. We recorded a loan loss provision expense of $7.7 million in the fourth quarter, compared to $3.1 million expense in the fourth quarter of 2021, or an $0.08 per share difference. Fourth quarter 2022's loan loss provision was also $3.2 million, or $0.06 a share, higher than the $4.5 million provision recorded in the late third quarter. Net charge-offs in the fourth quarter were $3.7 million, or 18 basis points of loans, compared to 22 basis points of loans in the fourth quarter of 2021 and seven basis points of net charge-offs in the late third quarter. Our reserve coverage increased slightly to 1.24% of loans from 1.22% at the end of September, which provided for loan growth. The next page shows trends in outstanding loans. Total loans were up $245 million for the quarter and included growth in both our consumer and commercial portfolios. Loan yields were up 38 basis points from the third quarter of 2022, reflective of higher yields on our variable rate portfolios as well as new higher volume rates. Total loan portfolio of $8.15 billion remains very well diversified and is evenly balanced between consumer and commercial outstandings. Total deposits were down $423 million from the end of the third quarter and ended the year $739 million below the end of 2021, or 7.2% lower. The decrease in deposits was primarily concentrated in certain larger, more rate-sensitive accounts. The effects of tighter monetary policy, inflation, and higher rate alternatives, including a laddered treasury security strategy deployed by our wealth management group for our own customers, continue to weigh on balances. Even though deposit balances declined from 2021, year-end 2022 deposits are still 25% higher than the pre-pandemic end of 2019. During the fourth quarter, we shifted from an excess liquidity position to a net overnight borrowing position. Our quarterly cost of total deposits increased to 17 basis points compared to nine basis points in the late third quarter. Interest-bearing deposits moved up from 14 basis points in the third quarter to 27 in the fourth quarter, and our total cost of funds increased 19 basis points from 18 basis points in the third quarter to 37 basis points in the fourth quarter. The next slide looks at detailed changes in our net interest income and margin. Net interest income increased $14.7 million compared to the fourth quarter of last year and was up $5.4 million from the third quarter of 2022 reflective of higher yields on earning assets. Reported fourth quarter net interest margin was 3.68%, up 17 basis points from the late third quarter and 60 basis points higher than the fourth quarter of 2021. With interest rates expected to continue to modestly rise in the near term, the yields on our variable rate earning assets are expected to continue to move higher over the next few quarters. We also expect to reinvest cash flows from our interest earning assets at levels above our current blended portfolio yields. Although we believe our deposit funding profile remains a core strength, we would expect increased levels of deposit beta in 2023. Going forward, retaining and growing deposits will continue to be a critical element of our ability to sustain the significant improvements we achieved in net interest margin during 2022. The trends in non-interest income are summarized on the next page. Excluding security gains and losses, our fee income was down 17% from the $4.3 million from the late third quarter. Our retirement plan administration and wealth management businesses' revenue decreased a combined $1.2 million, reflective of challenging market conditions as well as certain seasonally higher revenues in the third quarter. Similarly, fourth quarter revenues in our insurance agency are typically lower than the first three quarters of the year and were $450,000 below the late third quarter. In 2022, on a four-year basis, the company's retirement plan administration business recognized $2.5 million of service revenues related to statutory plan document restatement requirements that generally recur on a six-year cycle. Card services income decreased $3.9 million in the fourth quarter of 2021, driven by the bank being subject to the provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of 2022, which caps our per-transaction compensatory opportunity for debit card interchange activity. Lower levels of card utilization and changes in transactional mix resulted in lower card services income in the fourth quarter compared to the late third quarter. In addition, we continue to experience comparatively lower commercial lending fee opportunities in this rising interest rate environment. Turning now to non-interest expense, our total operating expenses were $79.5 million for the quarter, which was $4.4 million, or 5.9% above the fourth quarter of 2021, and $2.8 million, or 3.7% higher than the late third quarter, and included $1 million of merger-related expenses incurred during the quarter. salaries and employee benefit costs of 47.2 million dollars were 2.3 percent lower than the linked third quarter reflective of one less payroll day in the quarter and more favorable experience than certain of our benefit plans the quarter included some higher seasonal costs including some external services for several tactical and strategic initiatives we'd expect core operating expenses to drift modestly upward over the next several quarters as we continue our efforts to fill open positions in support of our customer engagement and growth objectives. We would also anticipate somewhat higher than historical levels of merit-based compensation increases in early 2023, probably 4% to 5%. In addition to investing in our people, we expect to continue to invest in technology-related applications and tools in order to advance our customer-facing and processing infrastructure. 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 for the presentation. As I previously mentioned, net charge-offs were 18 basis points in the fourth quarter of 2022 compared to seven basis points in the prior quarter. In the selected financial data summary provided with the earnings release, we have summarized the components of our quarterly net charge-offs by line of business. Consistent with previous quarters, fourth quarter net charge-offs were concentrated in our other unsecured consumer portfolios, which are in a planned runoff status. Non-performing loans declined again this quarter. We are continuing to benefit from conservative underwriting that continues to experience higher than historical levels of recovery. As I wrap up my prepared remarks, some closing thoughts. We started 2022 on strong footing and are very pleased with the results we achieved. Improving net interest income, additive results from our diversified fee income line, and favorable credit quality outcomes have more than offset higher levels of non-interest expense, which has allowed for productive gains in operating leverage. Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for 2023 and beyond. With that, we're happy to answer any questions you may have at this time. Chris?
spk23: Thank you, sir. Anyone with a question at this time can press star 1-1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for our questions. And our first question will come from Steve Moss of Raymond James. Your line is open.
spk02: Good morning.
spk14: Morning, Steve. Morning, Steve. Maybe just start off with, you know, loan growth here. You had a good quarter for loan growth. And just kind of curious as to how the pipeline is now versus before. I hear you guys in terms of the ongoing investment in upstate New York supporting business activity. But commercial growth was continuing strong. Just curious as to expectations going forward.
spk09: Appreciate the question. First of all, with respect to economic development in upstate New York, that's a long-term growth opportunity for us. And as I said before, MBT is best when we are playing that long game. Those pipelines are going to build over periods of years, not immediately, although... under the infrastructure funding that's been released recently. Several of our customers have been quite successful in receiving awards to be involved in large infrastructure projects. With respect to the commercial pipeline itself across the seven states, it's healthy. Clearly, we did a lot in the fourth quarter to take a pending pipeline and convert it to close. And there's refilling of the bucket going on, but we feel pretty good about the opportunities that we're given to look at and the diversity of those opportunities. On the consumer side, there's no doubt that the residential mortgage business has slowed down. So loan growth there is more muted and will be in this rate environment for a while. Although on the back half of the year, we'll see whether or not the housing market shifts again. We're watching that very closely. We mentioned our growth in the SunGage lending program, very strong third, fourth quarter. I think Scott also will talk to that subject. We expect that to level off now going into this year as our partner SunGage diversifies its funding sources and it's actively engaged in that. The beauty of that is we'll retain the servicing in all likelihood, and there'll be other investors to hold the asset. So generally speaking, optimistic with those exceptions.
spk14: Okay, that's helpful. And then maybe just on loan pricing, you know, what's the rate on new loans coming on these days and any call you can give there?
spk18: Sure. So sort of holistically or across the board, Steve, new loan production is really above 6% in all of our portfolios. From a pricing standpoint, I think that the discipline in the market around us has been pretty fair as people have started to experience some increase in some of their funding costs or have actually started to experience a little bit less excess liquidity on their balance sheet. I think some of that discipline is even a little bit more pronounced than what we're seeing in the market today. So, you know, important for us going forward, you know, from a pricing standpoint to price to the forward curve I think as most people have probably noted, you know, 2022 probably didn't force that until at least the mid-year point of the year or maybe even later because of the excess liquidity that exists on most banks' balance sheets at the time. But I think generally, you know, we're not getting a lot of pushback relative to our pricing proposals that are out there today. And they are certainly at levels of yield that are meaningfully above the blended portfolio that's on the books today.
spk14: Okay. That's helpful. And then maybe just one last one for me. If we get 25 basis points in February and 25 in March, just kind of curious, you know, how you guys are thinking about the margin. I mean, I hear you, there's, you know, some uptick in deposit costs, but just curious how to think about that our next couple of quarters.
spk18: Yeah. Yeah. And, you know, for us, I think we probably would have told you a quarter ago that we would have thought that that would have allowed for a little bit of a tick up in net interest margin expansion possibilities. I think with the drop in funding levels in the fourth quarter, probably a little bit more cautious about that than we were in September. So, yes, I think we'll get improvement relative to variable rate assets with those two moves. We're anticipating that. You know, the question is, can we still find the logical sources? I think that's probably be pointed out before. I mean, our deposit beta remains very low. We have a very granular deposit base. But to the extent that we've had drops in balances, not drops in relationships, but drops in balances, those have been primarily focused on our largest 150 customers. And I think as, again, most people realize short-term treasury yields at the front end of the curve are, you know, in the high fours today. And, you know, people with the high treasury acumen, some were helping and others have, you know, got there without us, have just found other opportunities in a higher yielding.
spk25: So, yeah.
spk18: Steve, to come back around to your question, you know, I think we'd like to believe that NIM stability is a possibility for the first half of the year, but I think that will be incumbent upon us holding our funding sources in place.
spk14: Okay, great. Thank you very much for all the color.
spk18: Appreciate it, Steve. Thanks for the question. Thanks, Steve.
spk23: Thank you. One moment, please, for our next question. And our next question will come from the line of Alex Trudell of Piper Sandler and Company. Your line is open.
spk29: Hey, good morning, guys.
spk05: First off, you know, just kind of going back to deposits, I was just curious, you know, you sort of talked about what happened this quarter, but do you have any sort of line of sight on sort of expectations for what deposit flows might be over the next couple of months?
spk18: So good question. So what we have out there, you know, today, what we're seeing is that, you know, with other opportunities relative for higher yields, there's a little bit of pressure on, again, higher balance accounts. Alex, the general broad cross-section of our deposit base, you know, has not been that influenced by that. Again, level of granularity in our deposit base is a huge advantage. I think relative to where we think competition is going, You know, remembering that everybody has an investment portfolio that is probably a little bit higher than it was pre-pandemic. So cash flows off the investment portfolio will be important sources of net liquidity, not only for us, but probably for everybody. But today, you know, one can't stimulate that because one is probably in a lost position relative to the front end of some of those. So with that in mind, I think there's a little bit more competition, even in our markets, which have historically been very stable, for incremental deposit dollars. So I think that's how we're sort of framing that, Alec. Typically, the first quarter for us is a net inflow quarter on the municipal deposit side. And, you know, I think we think that as much as they have some other choices as well, we'll still benefit from that.
spk05: Okay, that's what I was looking for. Are you able to... QUANTIFY OR GIVE US A LITTLE BIT MORE COLOR ON SORT OF THE FROTHIER, YOU KNOW, SOME OF THE DEPOSITS YOU SAW THIS QUARTER THAT YOU KIND OF ALLUDED TO, YOU KNOW, LIKE SORT OF THE PERCENTAGE OF OVERALL DEPOSITS THAT MIGHT BE IN THAT CATEGORY, WHERE IT WAS LAST QUARTER, WHERE IT IS THIS QUARTER, AND SORT OF WHAT MIGHT STILL BE CONSIDERED, QUOTE, UNQUOTE, AT RISK?
spk18: BOY, I'M SURE YOU'RE GETTING THIS RIGHT, ALEX. higher balance deposits that left the balance sheet typically found a wealth management or a short-term treasury solution that had yields in the four to four and a half range. And again, something like $600 million of our $730 million decline in balances for the year related to customers in our top 150 in terms of outstanding deposit balances. So an enormous concentration of a small group of accounts in fairness. You know, other than that, Alex, I don't know that there's anything else. If your question was sort of geared toward what are other people doing in the market for offerings, you know, I think we're certainly seeing some near-term or some mid-term offerings, whether they be CDs or just high-yield money markets that are approaching 4%. But I think they typically have some other requirements attached to them, you know, relative to achieving those yields.
spk05: Got it. And then just a point of clarification on the expense or on the fees, the $2.5 million that you alluded to that's on a six-year cycle. Is that something that, you know, we're going to see fees go down by $2.5 million in 2023 and then come back in 2028? Or how do we, you know, can you just maybe explain that a little bit better?
spk18: Yeah, sure. So, you know, there are statutory requirements either within the premise of ERISA or other, you know, that force documents to be refreshed on a recurring, typically a five- to six-year cycle. So you'd be exactly right. We had $2.5 million in 2022 that we don't think recurs in 2023. And depending on the statutory changes, requirements to plan legal requirements, is that a 2027 or 2028 event? Probably most likely. It would be more important for that line of business for us The run rate of the fourth quarter is probably more indicative of where we'd expect 2023 to start before any organic growth opportunities that we would be able to capitalize on.
spk05: Okay, so the $2.5 million was kind of earlier in 2022. In 2023, the $10.7 million, that's kind of the right starting point for the retirement plan administration feed line.
spk18: Yeah, that's a fair conclusion, Alex, absolutely. You know, much more concentrated in the first three quarters. I think we sort of finished up that program early in October.
spk05: Okay. And then just a final question for me. I think I saw in the presentation that commercial lines of credit utilization rates have gone down a little bit into the end of the year. I'm just curious, is that a function of customers paying down those lines, or is it a function of increased lines available that just haven't been drawn on yet?
spk09: Well, I think it's a function of a couple factors. Clearly, smart customers with excess liquidity, they're using some of that excess liquidity to pay down their debt. And I think also there are several large, unfunded lines of credit in that portfolio that are accommodations to broad customer relationships that have many other components to them, and they remain unfunded and are likely to stay unfunded. So it's kind of a mixed bag there. And, you know, I think going forward here as excess liquidity moves out of the system, you know, we're likely to see incremental borrowing there that we didn't see in 2022.
spk08: Okay. That's helpful. Thanks for taking my questions.
spk07: Appreciate it, Alex. Thanks, Alex.
spk23: Thank you. And again, If you have a question, please press star one one on your phone and wait for your name to be announced. As a reminder, to withdraw your questions, please press star one one again. One moment please for our next question. Our next question will come from Chris O'Connell of KBW. Your line is open.
spk11: Hey, good morning.
spk15: Just following up on the deposit flows question and having some of the investment portfolio cash flows helping out with loan funding there. Can you guys give us the either monthly or quarterly cash flows that are coming off the investment portfolio?
spk18: Sure. Chris, you know, the large piece of our investment portfolio is mortgage-backed securities. And so those cash flows have slowed down a little bit since rates started to rise. But I still think it's safe to think about $15 to $17 million a month of cash flows off the portfolio. And, you know, and that's given where current rates are. You know, maybe that accelerates again in the second half of the year.
spk15: Okay, got it. And I guess along those lines, Any chance you could quantify some of the commentary around the deposit betas, which, you know, obviously have held in extremely well so far, you know, but you guys are expecting to kind of increase on a go-forward basis, just, you know, relative to either last cycle or, I guess, to peers for this cycle?
spk18: Yeah. So, Chris, I would kind of frame it like this. Deposit costs were higher in December than they were in October, and they'll be higher in January than they were in December. And I think generally that marching up effect will happen throughout the quarter. Certainly would not be surprised if deposit costs were up 12 to 15 basis points in the quarter. But the trend line would suggest that that's going to be necessary to hold balances. It's important for us to retain some of those balances. It's really important for us to retain the operating side of those relationships. Excess liquidity can come and go from the balance sheet, but sustaining the operating account is always our first objective in all those cases. So I think that's kind of how we're thinking about it. The alternative for us, and again, we're 92% deposits funded and 8% borrowing funded at the end of the year, and that's the high mark for the last two years. So it's important to know that we have an apparatus for deposit gathering, and we're pretty good at it and historically have achieved good growth rates. We get back to more of a normalized cycle, I think we would suspect that we're capable of growing deposits in any rate environment. Will there be a little bit more pressure now with short-term yields? Yeah, maybe a little bit more. But I think that's something that reconciles itself after you get to stability of rate change.
spk15: Okay. Okay. Great, that's helpful. And on the insurances, you know, financial services line, I believe there's like a little bit of seasonality between the third and the fourth quarter versus the fourth and the first quarter of the years. Can you just remind us of, you know, what that seasonality is or what the expectations for that line is going into the first quarter?
spk18: Yeah, absolutely. And, Chris, actually, thanks for asking the question because, you know, there is, you know, it's always good at least once a year to remind people about some of the seasonality. So as it relates to insurance revenue specifically, the fourth quarter is normally our weakest quarter. Usually the first and the third quarter are stronger. And I think that's really centered around effective dates of the type of insurance that we originate in our agency, you know, whether it's commercial insurance, property casualty on the retail side, or benefits-related stuff. It's not unusual for people to make changes to their plan or have renewal dates that tend to be January 1, July 1 centric in each of those cases. So, you know, again, just back to your question around seasonality, we normally see a one to two cent improvement in insurance and wealth management combined in our first fiscal quarter compared to the linked fourth quarter. However, it's not unusual for us to incur another cent per share of costs on the utilities and maintenance side in the winter, you know, just relative to the geography that we live in. And quite frankly, I think most people remember this, that, you know, we typically incur three to four cents a share in the first quarter associated with elevated payroll tax obligation and some equity compensation that just tends to be front loaded. So past that, from a seasonality standpoint, you know, not anything that's substantial or that sticks out for us. I will make a comment, a little bit quirky, but, you know, 2023 has 65 payroll days in each of the four quarters, which is highly unusual. Normally, there's a one or two-day fluctuation that goes along with that. So, I think in terms of the stability of some of our operating costs should probably be something that's a little bit easier to model next year.
spk15: Okay, great. And then lastly, I mean, credit's held in, you know, super well so far. There doesn't seem to be, you know, a ton of movement in the buckets, you know, for you guys this quarter. But, you know, generally, you know, can you just, you know, give us an outlook on what you guys are seeing in your markets and any kind of areas or cause of concern in either, you know, the commercial or the residential portfolios as you look out into 23?
spk09: I'll take that one. Thank you. Last week, we completed a comprehensive review of both our commercial and consumer books from a credit risk management perspective. We did that with our board. The year ended at a place that we've never seen in the history of this company in terms of the quality of our credit portfolios. With that said, you know, I would expect as we head into a more normalized environment that there'll be a reversion towards pre-pandemic 2019 levels over time. Certainly not immediately, but over time. And we'll see that initially in the consumer portfolios. We don't see it now, but it'll come. Commercial portfolio, very strong. Business banking portfolio, very strong. I don't think there's a non-performing loan in excess of a million dollars in the total credit book. The sustainability of that will probably revert back to a more normalized non-performing level as well over a longer period of time. We feel good about it now. We don't see cracks. You know, I know others talk about certain segments of the CRE product line, but we're not feeling that now, and we feel pretty good about the LTVs in each one of those asset classes in CRE, so pretty stable there.
spk18: Let me add to that real quick. Our philosophy has been that we will provide a provision for net charge-offs, and we will provide a provision for loan growth. Sometimes that loan growth is in different segments of our portfolio, and that has a higher coverage level in certain portfolios versus others. But I think important to take the takeaway here is, you know, we have not wavered in that at all. So coverage ratios of 1.24%, I think you'll find are probably slightly above our peer group. And we think that's appropriate and judicious, you know, certainly given the, you know, the dynamic of, you know, of the economic conditions that we expect to go forward with.
spk13: Got it. Appreciate the color. Thanks for taking my questions.
spk03: Thank you, Chris. Thanks, Chris.
spk23: Thank you. And one moment, please, for our next question. Our next question will come from the line of Matthew Brees of Stevens, Inc. Your line is open.
spk17: Hi, good morning. I was hoping you could break out the crystal ball on deposits again. I have a follow-up. I guess I was wondering... Do you think the overall mix of non-interest bearing is at risk here? And could we go back to levels we saw pre-COVID or even prior? I mean, just given, I mean, Scott, you talked a little bit about the granularity of the book. Assuming that that continues to be a structural advantage, how granular is it and is it continually at risk from mobile banking offers that we see every day north of 3% or 4%?
spk18: So I would frame it this way, Matt. It's a really good question. And, oh, by the way, our crystal ball is not that clear this morning. But at the same point, I guess what I would say is that we have seen a little bit of migration away from pure non-interest DBA into other alternatives. But it has been typically our customers with a much higher treasury acumen relative to larger businesses with full-time professionals managing their net cash flows. So we've seen a little bit of that. I think in the lion's share, the broad cross-section of our business, a lot of our customers, whether they're retail or small business, just don't have that much excess liquidity where they think that going through the machinations of moving certain of that amount off into alternative instruments, even in the near term, is that prolific. For them, if you've got excess balances of $25,000 or $50,000, You know, what is the net differential? We have some products in our deposit portfolio to address, you know, moving people up over time, tiered-based products. So I think those will be affected. They've historically been affected. I think what you're even seeing is that our customers still have higher than historic levels of pure checking balances, but they're becoming a little bit better at moving those off into money market-type products, even on our own deposit portfolios. So, Matt, I think I'd come back around to say I think on a peer comparison, our granularity of our retail and small business portfolio will be an advantage on the deposit side. I think, like everybody, managing some of the large customer expectations and, in fairness, reminding some of those large customers how low their borrowing rates still are. you know, will be something that will continue to be a challenge for us and a task for us. But truly, I mean, that's about managing relationships, and I think we'll be really effective at that over time.
spk17: Got it. Okay. And then just acknowledging that the loan-to-deposit ratio ticked up, you know, still well below 100%, but at 86%, you know, any – you know, any limitations there you'd put on yourself or any ceiling you'd like us to keep in mind? And at what point does it start to impact your loan growth outlook?
spk09: So let me start there and then Scott will pick it up. I think historically anybody who's followed MBT for a long period of time knows that we have very successfully operated this company pre-pandemic at a loan to positive ratio in the low 90s and we feel comfortable being in that territory. I don't see us getting there very fast, but that's not a place that we're adverse to being at if the loan demand presents itself at the right yield. So we still view it that we got headroom here and loan demand, if strong, we'll keep funding.
spk18: I think about the only thing I would add to that, John, is that I think we've been pretty transparent about this, and John made some comments on that. We certainly don't expect loan growth in the solar residential portfolio in 2023 to be similar to 2022's results. I think we've talked in the past about where we are today. We think we have a little bit more balance sheet capacity for that type of instrument. We're very happy with that instrument from both a credit performance you know, as well as effective yield performance. It's also a borrower base that has a meaningfully higher than average, you know, FICO score. So we like the borrowing base there. But I will say that, you know, as that business has matured and our partnership with Sungage has matured, getting to more forward flow opportunities for them, warehouse lines of credit that ultimately become securitization, that's where that business is headed. And so the utilization of our balance sheet won't need to be anywhere near as prolific going forward. So I think that gives us a little bit more room relative to that loan to deposit ratio. I also should remind people that not only do we think we have a couple hundred million dollars of cash flow coming off our investment portfolio, but the portfolio is six to $800 million larger than it had ever been. So over time, that will also be a source of net liquidity for us. May or may not change our loan-to-deposit ratio, depending on how much demand we see on the loan side. But in fairness, lots of other liquidity sources that exist within our world. And now that yields on most lending instruments are six or north, some mix of wholesale funding is not really a bad thing. It's a little bit more expensive than the deposit base, but not a bad thing.
spk17: Understood. Okay. As you can imagine, you know, this stage in the cycle and everything going on during COVID with, you know, car prices, we're getting more questions on exposure there. Could you just remind us within that dealer finance book, you know, how much is indirect auto versus floor plan lending? And then, you know, kind of stratify the FICO exposures you have.
spk18: Sure, absolutely. You know, so that portfolio that's just under a billion dollars is all indirect auto. We have very, very small amounts of dealer finance, you know, or plan financing, you know, just some really older legacy. Legacy less than 20 million dollars. So most of that is indicative of that. In terms of FICO ban for indirect auto, an average FICO above 750. And to your point, the Mannheim Index is still very, very high, very buoyant from historical standards. I think the silver lining to that is we made loans during the last couple of years in indirect auto that were lower than historical yields. which meant that the customer is very quickly working through their pay down of their instrument. You know, so I think from a loan-to-value standpoint, we're not concerned where we are today. You know, there's still a little bit of a backlog relative to vehicle inventory, and especially in our markets that don't enjoy a lot of public transportation, you know, everybody drives to work. So from a commentary standpoint, I stay not concerned about that portfolio and still, you know, being able to manage the customer outcomes. Historically, Matt, in that employment characteristics or unemployment characteristics and the performance of that portfolio have been linked at the hip. So from a productive standpoint, we think that portfolio will still be something that's, you know, meaningfully additive to our net mix all year long.
spk17: Got it. Okay, thank you. Last one for me. Scott, you had mentioned that you expect a slight migration higher on overall expenses in 2023. I was hoping you could just be a bit more specific there. Are we looking at low single digits or mid-single digit expense growth this year versus next?
spk18: Yeah, deal aside. Yeah, if I framed it this way, I would tell you that – You know, the midpoint between our third quarter operating expenses and our fourth quarter operating expenses is probably a really good baseline before we start to talk about merit increases. We expect sort of a late first quarter merit change for our folks in the neighborhood of 4% to 5%. And what we think about that is a combination of merit changes and some compression needs that we have. You know, with people being hired in more recent times at rates maybe a little bit higher than some of their peers, we do have some compression to deal with. I think that's across the board for most enterprises. So we suspect instead of sort of the historical standard of 3% type of inflationary increases, we're a little bit above that going forward. As it relates to the rest of our non-operating base, you know, maybe expect a little bit more utilization of some technology tools on a full scale. a fully incurred basis next year that pushed that up a little bit. But other than that, we're not seeing signs that anything else is really being meaningfully impacted by inflationary price change in our operating base.
spk17: Perfect. I appreciate it. That's all I had. Thanks for taking my question.
spk18: Madam, let me give you one more. Someone just reminded me. Our friends at the FDIC are trying to collect a little bit more on a per-deposit-dollar assessment basis next year. We think that probably costs us $0.04 a share next year in terms of that higher base. And I think this goes without saying, but as a reminder, in the first half of the year, we saw the negative comparison because of the Durbin impact, you know, because obviously that started for us in July. So, you know, $8 million less in debit interchange revenues in the first half of the year is our expectation compared to 2021. Got it. Okay.
spk17: Do you have that? You said $0.04. What is that on the dollar amount or relative to deposits in terms of basis points?
spk18: Yeah, so it's $2.2 million of expected expense. And in my head, that must mean it is two or three basis points.
spk17: Got it. Okay. Thank you, Scott. Thank you, John. I appreciate you taking my questions. Thank you, Matt. Thanks, Matt.
spk23: Thank you. And I'm now not showing any further questions. I will now turn on the call back to John Watt for his closing remarks.
spk09: Thank you, Chris, and thank you all for participating in our fourth quarter and year-end 2022 call. Look forward to catching up with you at the end of the first quarter. Have a great day. Thanks.
spk23: Thank you, Mr. Watt. This concludes our program. You may now disconnect and have a great day.
Disclaimer