Nbt Bancorp Inc Q2 FY2022 Earnings Call

Good day, everyone. Welcome to the NBT Bancorp Second Quarter 2022 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.

Thank you, Josh, and good morning, everyone. Thank you for participating in this earnings call covering NBT Bancorp's second quarter 2022 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, and our Chief Accounting Officer, Annette Burns. We are extremely pleased with our results for the second quarter of 2022, including earnings per share of $0.88, ROA of 1.28% and ROATCE of 17%. I'd like to take a moment here to highlight activity in our businesses. Loan growth continued to be strong. Our commercial business generated $310 million in loan originations, an increase of 24% over the last quarter. It's clear to us that our commercial and small business customers continue to successfully navigate the challenging operating environment in the face of supply chain issues and inflation, and NBT is there to support them. The second quarter performance of our Sungage residential solar partnership is also notable. Originations were strong in the quarter and credit quality continues to be pristine. Our fee-based businesses continued their strong performance with total non-interest income at nearly 33% of total revenue for the second quarter. Although we are very mindful that the forward environment is likely to be volatile through six months, we observe a very strong consumer. Balances in personal checking accounts grew in the second quarter and credit quality in consumer loan portfolios is very healthy. Delinquency across all consumer loan categories is below pre-pandemic levels. I'm happy this morning to report that at a meeting yesterday, our Board of Directors approved a 7% increase in the dividend or $0.02 a share to $0.30, making this our 10th consecutive year of annual dividend increases. As we head into the back half of the year and the potential for increased levels of uncertainty and volatility, we are well-positioned with strong liquidity and capital levels, a diversified business mix, a highly effective risk management practice, and a team of experienced professionals. So with that said, Scott, I'm going to turn it over to you to talk in greater detail regarding our financial performance. And following Scott's remarks, we're happy to take your questions.

Thank you, John, and good morning, everyone. Turning to the results overview on Page 4 of our earnings presentation, our second quarter earnings per share was $0.88, which was down from $0.92 a share reported in the second quarter of 2021, and $0.02 a share lower than the first quarter of 2022. These results were achieved despite a $3.4 million decline or $0.06 a share in PPP income recognition compared to the second quarter of last year and a $700,000 decline in PPP income from the first quarter of 2022. The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth, productive incremental deployment of a portion of our excess liquidity into investment securities, increases in the Federal Reserve's targeted Fed funds rate, and the continuation of historically low funding costs. We recorded a loan loss provision expense of $4.4 million in the second quarter compared to a provision benefit of $5.2 million in the second quarter of 2021 or $0.17 per share swing, and a provision expense of $600,000 in the first quarter of 2022. Net charge-offs in the second quarter were $800,000 or 4 basis points of loans compared to 7 basis points of loans in the second quarter of 2021, and 14 basis points of net charge-offs in the linked first quarter. Our reserve coverage increased slightly to 1.21% of loans from 1.18% at the end of March. The next slide, Page 5, shows trends in outstanding loans. On a core basis, excluding PPP, loans were up $162 million for the quarter and included growth in both our consumer and commercial portfolios. Our total PPP balances as of June 30 were down to just over $17 million. With forgiveness almost complete for both the 2020 and 2021 vintage loans, we recognized $1.3 million of interest and fees associated with PPP lending during the quarter and we have just $400,000 in unamortized fees remaining. Excluding PPP recognition, loan yields were up 16 basis points from the first quarter of 2022, reflective of higher yields on our variable rate portfolios, as well as higher new volume rates. Moving to the slide on deposits, we were down $433 million from the end of the first quarter, which was a result of a $100 million brokered deposit maturity within the quarter, as well as seasonal declines in municipal deposits. The matured brokered deposit was the last of our wholesale funding which we secured in the early and uncertain days of the pandemic. Our quarterly cost of deposits remained flat at 7 basis points, and we continue to add new accounts. The next slide looks at the detailed changes in our net interest income and margin. Net interest income increased $8.4 million compared to the second quarter of last year and was up $7.2 million from the first quarter of 2022, reflective of higher yields on earning assets. Reported second quarter net interest margin was 3.21%, up 26 basis points from the first quarter of 2022 and up 21 basis points from the second quarter of 2021. Looking forward, with interest rates rising, the yields on our variable rate earning assets are expected to continue to move higher. We also expect to reinvest our loan and securities portfolio cash flows at levels above current blended portfolio yields, and as such, we would expect to see more opportunities for additional core margin improvement. Although we believe our deposit funding profile is best-in-class, we would expect some level of deposit beta to be present beginning in the third quarter. Our balance sheet still continues to exhibit a meaningful level of assets sensitivity. Moving to the trends in non-interest income on Page 8, excluding security gains and losses; our fee income was up 8% from the second quarter of 2021 to $42.2 million, but lower by $600,000 from the linked first quarter. More broadly, non-spread revenue was 33% of our total revenue in the second quarter of 2022 and remains a key strength and value driver for NBT. Our retirement plan administration businesses experienced strong year-over-year growth driven by higher activity-based revenues and continued organic growth. Wealth management fees were lower than the linked first quarter as well as the second quarter of 2021 due primarily to market performance. Banking fees improved almost 11% from the second quarter of 2021, driven by both higher card-related income and service charges. As a reminder, banking is subject to the provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter, which caps our per transaction compensatory opportunities for debit interchange. We estimate this will reduce quarterly debit card interchange income by approximately $3.7 million or almost $0.07 a share. Turning to non-interest expense, our total operating expenses were $76.1 million for the quarter, which was $4.7 million or 6.6% above the second quarter of 2021. Salaries and employee benefit costs of $46.7 million were up 9.5% over the prior year and included merit-related salary increases, as well as higher performance-based incentive compensation and increased medical expenses. Total operating expenses were also higher than the linked first quarter of 2022, reflective of one additional payroll day, annual merit pay increases, which we process annually in March, and higher medical costs. We expect core operating expenses to drift modestly upward over the next several quarters as we continue our efforts to fill a higher than historical level of open positions in support of our customer engagement and growth objectives. 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 to the presentation. As I previously mentioned, net charge-offs were 4 basis points of loans in the second quarter of 2022, compared to 14 basis points in the prior quarter. Both NPLs and NPAs declined again this quarter. We are continuing to benefit from our conservative underwriting, and we have been experiencing higher than historical levels of recoveries. As I wrap up prepared remarks, a couple of closing thoughts. We started 2022 on strong footing, and we are pleased with the fundamental results achieved in the first half of the year, improving net interest income, solid results from our recurring fee income lines, and exceptional credit quality outcomes have more than offset higher levels of non-interest expense, which has allowed for productive gains and 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 the balance of 2022 and beyond. With that, we're happy to answer any questions you may have at this time.

Thank you. One moment for our question. Our first question comes from Alex Twerdahl with PSC. You may proceed with your question.

First off, I was just hoping you could give us a little bit more color on the momentum in the commercial loan portfolio with respect to growth that you saw during the second quarter. Is that momentum strong enough to carry into the third quarter? And maybe give us a little bit of color on sort of which geographies have been the strongest and where new loan yields are coming on relative to the 4.08% book yield?

Sure. Let me talk about where we're seeing the growth and then Scott will follow up with our view of loan yield and where we can go from here. It's been very strong, Alex, as you know, in the first quarter, we experienced growth in excess of what we would normally experience in the markets we serve. And that's a post-pandemic impact that is positive for us and positive for the economy. We see it across the board. It's in New England. We see it in our core markets. We see it in Northeastern Pennsylvania, and it's a good mix of C&I business and CRE as well. I think we would observe that developers are slightly more cautious as they think about multi-family projects going forward. But we have several that are in process now, and we'll continue to build out over the next 12 months. The demand there continues to be high in those markets. On the C&I side, we see business owners expanding their plant capacity and buying equipment becoming more efficient, all the kinds of things that a community bank like NBT knows how to support and is very good at doing. No doubt it's a very competitive market. But I think I've been saying that for 37 years in these markets that it's always competitive in the commercial business, and it's the quality of what we have to deliver that distinguishes us, and that explains the high production levels in the second quarter. A slight moderation I would suspect towards the back half of the year driven by higher rates. But the pipelines are still active and moving towards closing through the third quarter and towards the end of the year. Scott, why don't you talk about yields a little bit?

Sure. Alex, let's take this sort of in two chunks. During the quarter, especially the early parts of the second quarter, we were certainly still adding new assets that had interest rates in the low fours, because we're making pipeline commitments that were out there prior to that. As the quarter came to an end, very few of our assets were not getting a look at 5%. So probably still closing some assets in June in the high fours, but generally speaking, the pipeline commitments have now moved out to where most assets that are attractive for us are in the 5% level.

That's really helpful. Can you explain the reasoning behind the increase in the Allowance for Credit Losses this quarter? It seems like there isn't anything you've mentioned that would indicate this was necessary, but there's clearly a lot of uncertainty ahead for the latter half of the year. What specifically led to the increase in the Allowance for Credit Losses?

Yes. So, Alex, again, excellent point, from a timing standpoint. I would call our approach from a reserving standpoint in the second quarter as prudent. You answered your question within the construct that you just asked, which is the level of uncertainties probably has us thinking that the weighting of downside versus the weighting of a baseline forecast are probably pretty close to each other at the current point in time. So again, you kind of think about what we did is we provided enough provision to cover the minimal level of charge-offs we had, and then we provided enough to fund the growth that the portfolio experienced, and then a little bit more because the macroeconomic conditions ever so slightly had modest deterioration during the quarter.

Okay. And then, just a final question for me, just with respect to M&A, we've talked a lot in the past about, kind of, the desire to do a deal, now these guys are over 10 billion, and obviously, you guys have been very, I guess, cautious on approaching a transaction. I'm just curious, with the rapid change in interest rates, and all the volatility in the markets that the transaction today is something that you could pursue?

So great question, Alex. Our strategy hasn't changed as expressed in the last four quarters that, yes, you're right, we are very selective in terms of ensuring that we have the right partner to drive our strategic growth. But there are a lot of conversations with potential partners that continue. I guess, Scott and I would observe that there was a slight pause in the second quarter while those partners considered the impact of a shock in rates on their balance sheet in the context of an acquisition and on their valuation, and that makes sense to us, and I think they are working through what the upgrade environment means, and there'll be some adjustments and understanding of what they were able to achieve. But I think based on what we have been able to continue to have dialogues around, it's still active. And again, what do we think about when we're approaching one of those opportunities? How does it accelerate our otherwise established strategy? And, you know, what kind of partner from an integration perspective will we be able to do a deal with? And we want to make sure that in the end, all of those things align, and that we're doing the right thing by our existing shareholders when we do it. So again, short answer, no change in strategy, just a slight pause because everybody is trying to figure out what this rate environment means to them.

And Alex, I'll follow that up with this, to John's point. By any sort of market perspective, 225 basis points in four months is a shock, right? That's a shock to the rate structure. So what does that mean? For purposes of our consideration of potential partners, we've had to look at the impact on beginning regulatory capital, impacts of AOCI reductions and potential interest rate marks on loan portfolios. Certainly doesn't mean we think less of the operating characteristics of a business we might be interested in, but we at least need to be cautious and understand what that does to opening equity and capital ratio levels, and we need to be responsible with that. I think there's a little bit more clarity now as to where we are probably going to stand relative to long-term rates, and that's probably helpful in sort of rekindling some of the dialogue that we were having earlier in the quarter.

Thank you. One moment for questions. Our next question comes from Chris O'Connell with KBW. You may proceed.

Hi, good morning. Hi, guys. So why don't you start off on the expense guide? I know it came in a little higher this quarter on some of the seasonal factors you mentioned and to modestly drift higher from here. Just hoping to get a little bit of color into maybe like the longer-term trends because if I'm reading it right, relative to kind of the $73 million to $74 million guide last quarter, this will put you guys kind of toward the upper single-digits for growth in 2022 versus more low-to-mid single-digits previously. Does that mean that you're making more hires this year and that the pace kind of moderates in 2023? Or does it not really change the long-term outlook? Thank you.

Thanks, Chris. Appreciate the question. So let me start to frame that, coming out of the first quarter where our operating expense rate was closer to $72 million, a couple sort of probably optically astute discussions would be around, the first quarter we were not still fully engaged. There was still enough uncertainty out there in the early stages of the first quarter where some of our things like marketing initiatives and group gatherings and full engagement from a customer perspective were not able to get through some of those. The second quarter tells a different story. So just the pure transactional and activity level expenses were higher in the second quarter because it's stuff we didn't do in the first quarter. Adding to that was an additional payroll day off the first quarter, and we're performing very well relative to some of our incentive objectives. So for us, incentive compensation is a higher proportional value of our expense run rate in 2022 than it certainly was in previous years, and that probably continues for the balance of the year, given some of the success we're having. Your question relative to how do we think about that going forward and modest uptick in expenses, another payroll day in the third quarter, but even amounts of payroll days in the fourth quarter with the second quarter, just the way the calendar falls. We still have a sort of 50 to 60 open position outcome in our company today. Would we like to add those folks? We sure would. Are they available for us to do on a recurring basis? It's been difficult. So I think you kind of look at it this way and say $76 million is not a bad run rate. It's probably a little higher on the incentives than we would've said historically. And then from there, I would say if we could hire a few more people to help us with our customer-facing objectives that we have from a growth standpoint, we'd be happy to bring those aboard. But I still think you don't get meaningfully above sort of that $76 million run rate going forward.

Okay. That's helpful. And then as far as the deposit moves this quarter, I hear you on the $100 million of broker CDs. How are you seeing, I guess, what if you could quantify the municipal seasonal magnitude, that'd be great? And maybe how much of that you think would be coming back in? And then, how are you thinking about kind of just deposit flows and what you're seeing from customers going forward on overall deposit growth?

Thank you for your question, Chris. To address your point, we had brokered money market funds that matured in the second quarter, which we secured early in the pandemic for liquidity. Ultimately, we didn’t need those funds, so we let them run to maturity. The $300 million drop in deposits for the quarter was largely due to seasonal outflows on the municipal side. We also noticed significant withdrawals from some rural healthcare organizations within our municipal and non-profit portfolio, as they spent some of their funds in the second quarter. Much of this spending was linked to pandemic-related support or government assistance they received and used for increasing costs over the last couple of years. On our healthcare clients alone, this amounted to nearly $75 million in the quarter, and we don't expect this to return in the near future. Typically, the third quarter shows a net positive trend for municipal deposit flows, especially since school taxes are collected in September, which usually leads to an uptick in deposits. However, with the rapid interest rate changes over the last four months, money market aggregators are resuming their operations. Those who had not previously engaged with the market are now reinvesting because of the current volatility. Some of these aggregators are offering rates significantly above our core rates for money market opportunities. While it’s possible that some of our larger institutional and municipal clients may take advantage of these higher rates before we can adjust, we don't see this as a significant part of our $10 billion deposit portfolio. Overall, we are still adding net new accounts, which is crucial for us. While account balances may fluctuate, the key is the growth in new accounts, indicating progress.

Okay. Got it. That's helpful. And then, kind of, just piggybacking there, I hear that deposit costs start to move up in the third quarter. Just trying to see if there's any more color there or any way to frame that? Obviously, you guys have had low betas in the past and we'd expect them to be running below the market, at least initially here, but, just given the magnitude of the moves and the speed, any colors to, the magnitude of what you guys do you think it would be helpful?

Sure. I would like to divide our deposit portfolio and mention that we have about $7 billion in DDA, checking, and savings deposits where we don't anticipate significant rate changes in the next six months. Our focus is on the remaining $3 billion in deposits, which are more sensitive to interest rates. We expect to have discussions with some of these customers regarding the federal funds rates increasing by 225 basis points, starting tomorrow. We might see a modest response from them, and we plan to approach this carefully. Chris, we are starting with base costs at 7 basis points and entering the quarter with $300 million in net liquidity. We can afford to engage with customers in a thoughtful manner to clarify the definitions of excess liquidity and core accounts.

And if I could follow on that, Chris, it's in the DNA of this company to be very thoughtful about how we manage the deposit book in an upright environment. We've had great success with that in the past. It's an integrated approach on the frontline, in every branch, in every commercial lending office, in the business banking sector of our businesses, and a lot of collaboration on the finance side with those folks to make sure that these customers that we've been serving for many, many years have their needs met, but also, we continue with our long history of being very careful on how that beta moves quarter-to-quarter. So we feel good about all the tools we have in place to do it, and we would expect that we'll replicate our practices in the past. We'll see what the outcome there is, but we feel good about how we're going to move forward in the short to medium term.

Great. Yes, I hear you. And on the fee side of the business we're just hoping to get an updated outlook as to how you're seeing the retirement plan business, wealth, and kind of the insurance segments, given some of the market impacts going into those into the third quarter. And then, if you could quantify the contribution is significant from the H.A. Rogers announcement?

Chris, I'll take a shot at that. First and foremost, we'd like all three of those businesses. We continue to think all three of those businesses are investable in terms of their organic growth objectives, as well as the potential for bolt-on acquisitions as we've done, especially in the retirement plan space over the last several years. To your point, you're right. Equity market performance does have an impact on their revenues. It's not all of their revenues, but it's some of their revenues, and it matters. So did we get the full impact of some of the market declines in the second quarter? There might be still a little bit more hangover to come into the third quarter, presuming the market is still at the level of valuation it sits at today. Underlying attributes, we like the organic growth that we're experiencing in all those lines of business. We're soliciting and securing the right kind of new business. We're also doing things from a technical infrastructure standpoint in all of those businesses to try to expand our services and product base while we're adding to a wider group of customers. One thing we've talked about, at some detail internally, is we really haven't transported a lot of those attributes, especially on the wealth management side, into our new markets in New England. And that's an opportunity. Now that means finding good people. But those people are out there, and we're having chats with those people. So we would love to round out our services in some of those markets we've been successful at from a commercial lending standpoint with a full scope of NBT products. Oh, I forgot to mention the small insurance agency we acquired in Northern New York. While it’s a small addition, it fits us well. We share common customers in the banking sector. The principal of this business has been a loyal customer and advocate for us for many years. We're pleased to have the chance to expand our reach through this acquisition. We see it as a great opportunity to integrate into our offerings. If we could find a few more similar opportunities, we would be eager to pursue them.

Thank you. Our next question comes from Matthew Breese with Stephens. You may proceed.

First one for me, just in the Appendix of the presentation, you show that the overall loan portfolio is 62% fixed and 38% adjustable/floating. How much of that is pure floating and through floors? And then, I was hoping for a bit of color around duration on the fixed side and then the adjustable side.

Let's address the simpler question first before moving on to the duration topic, Matt. We estimate that there's about $2 billion in pure variable assets. When the Fed funds rate changes, which typically affects primary rates or LIBOR SOFR, we see the impact on that the same day. However, our customers may not notice this benefit right away due to a potential one-month lag influenced by their billing cycles. In some instances, adjustments might only be reflected in the subsequent billing cycle. We're considering that $2 billion figure in connection with your follow-up. It's clear that we have not yet realized the full benefits of the Fed funds changes from March to June, but we expect to see this in the third quarter, along with any updates regarding interest rate hikes. Generally, speaking about duration, we hold many five-year repricing instruments in our commercial loan portfolio and may offer fixed terms extending up to 7 to 10 years in certain situations. However, the duration of these instruments typically doesn't extend that long because customers often come back to us with new opportunities well before that duration is reached. Our cash flows from the loan portfolio, considering natural amortization and maturities, amount to around $2 billion annually, providing us the chance to reprice at higher rates as they continue to rise.

Understood. Okay. And then this leads into my second question, Scott, in your opening remarks, you kind of led us to believe that you expect NIM expansion, at least in the near term. You had mentioned you haven't gotten the full benefit of the rate hikes. We're about to get another, at least it seems to be consensus, that we get another at least 75 basis points this week, plus perhaps another 50 to 75 basis points later in the year. Is it possible that we see kind of repeat performance on the NIM expansion this quarter in the third quarter, or could you give us some idea, frame for us better, what you anticipate on the NIM for the duration of the year?

For the year, I want to break it down into a few categories. In the second quarter, our net interest margin increased due to a significant decrease in cash equivalents. While we won't see that same decrease in cash equivalents in the third quarter, we will experience the full impact of recent changes in fed funds rates. This impact was about 15 to 16 basis points on loan yields, and I believe we could see a similar effect in the third quarter. Additionally, there will be a necessary response related to deposit beta, which is likely to be more relevant in the fourth quarter. As we are currently a third of the way through the third quarter, we haven't had to make significant adjustments yet, but that is forthcoming. We need to engage in constructive discussions with some of our customers regarding this. So, while I think a 21 basis point increase would be welcome, a 26 basis point increase might not be fully achievable, though I do expect a reasonable portion of it.

Okay. And then I noticed that the loan portfolio breakout is a little bit different this quarter. Specialty lending is now broken into resi solar and looks like other consumer bought the balance. Beyond just the resi solar piece, if I think about that legacy specialty lending book, what else was in there? What made up the delta? Just give us the numbers and the yields and the historical kind of loss content there.

Yes. So you're right, we did do that. During the quarter, we had some productive conversations with investors who were looking for a little bit more clarity, because we've had some real success with residential solar. We really liked the platform that we're partnered with, our friends at Sungage. That’s been highly productive for us, so we continue to look at that as opportunistic. What's left in the pool? We still have some assets from the Springstone relationship that we've had historically. They have had higher than our blended book yields historically. But we've also experienced a little higher level of net charge-off in that portfolio. Those were dental and other healthcare-related consumer unsecured credit outcomes. They performed very well historically. It's been a net-net positive for us historically. What's also in there now is that since Springstone was acquired by LendingClub, to the extent that we were still participating on their platform, we're really not today. So I would argue that portfolio is in a runoff status, which we're fine with. We're fine with reallocating some of those outstandings into other portions of our portfolio.

Recall there, Matt, once LendingClub acquired Radius Bank they had a charter that enabled them to originate directly. So we no longer were in front of them originating that category of loans.

Okay. So as we think about those two buckets, one is growing the Sungage piece. Could you frame for us what you expect for loan growth there? The other piece sounds like it's in runoff. Could you give us some idea what the pace of runoff?

Yes. So the pace of runoff on that portfolio is probably like a two to three-year duration. It may be that speeds up because you're not generating anything new. On the Sungage side, really productive growth has been experienced in the residential solar world. Remember, that's a national platform. We’ve really geared up to be able to take more of that. It meets our credit attributes in terms of our credit box. We're dictating those outcomes. We're very happy with the credits that we're putting in there. And as a reminder, Matt, I think you know this, but that's a better than average customer with a better than average FICO score. Somebody who makes a decision to do a $25,000 or $30,000 investment in their own property for a solar array is not just run of the mill from a customer standpoint. We like the attributes of that. Could that grow again at the paces that we've experienced over the last four or five quarters for another couple of quarters? There's potential for that. I think it would be really interesting to see what happens in that market with higher demanded yields because that's where we are today. The yields that are necessary in order to stay productive in that portfolio are moving up. Does that change how the customer base views that opportunity relative to their net utility savings? Does that change how installers view those opportunities? I think the jury's still out on that. But if we could get the desired yields that we think are appropriate today, we're certainly willing to grow that portfolio.

Got it. Okay. And then my last one, I asked another upstate New York bank the same question, but the winners in your neck of the woods tend to be longer and harsher than a lot of the country, fuel costs per the CPI year-over-year were up nearly 100%. How do you feel about the health of your customer base, your consumer customer base heading into the winter months? And do you feel like there's any potential for deterioration in credit quality on the back of it?

I think I said in my comments upfront, Matt, that we have not observed through the end of the second quarter any deterioration in the consumer's behavior or in the consumer credit portfolios. We saw a growth in consumer checking accounts. With that said, we're very aware that the proportion of the annual pay or the weekly paycheck allocated towards gas and heating is going to go up, and we're watching that closely. We think the consumer has a nice cushion going into it. The other visibility we have here are several large integrated commercial home heating and propane fuel distributors who we're close to, who obviously are also watching that same behavior. Between us, we share information about how the consumer is behaving, and there's a degree of caution there, but no panic and no observation of inability to pay. We'll watch it. I think Scott said it earlier; consumer credit from a past due, not performing, and charge-off perspective can't get any better than it is today. So will there be an eventual reversion to the mean—the traditional levels of performance of those portfolios over time? Sure. I would expect that to happen, but I don't see it happening in one quarter or two quarters. It’s going to take some time for that to occur.

Thank you. One moment for questions. Our next question comes from Alex Twerdahl with PSC. You may proceed.

I have a quick follow-up question regarding the impact of Durbin starting in the third quarter. The ATM and debit card figures have fluctuated a bit over the past few quarters. Is the $3.7 million reduction something we should consider? Should we take the $9.75 from this quarter as a baseline, or does that figure include elements that may not be repeated?

So, Alex, within that line item is also true sort of ATM utilization fees that we get when our non-customers hit some of our ATM sources. I think when we look at that $3.7 million reduction, that's probably a number that we put that and said, what were our run rates for the first half of the year? I think we think somewhere between $7.4 million and $7.5 million is maybe the outcome in the back half of the year. So hopefully that helps you from the solving of that. But there is other stuff in there than just pure debit interchange.

Okay. And some of that other stuff maybe hit a little bit harder in the second quarter relative to prior quarters?

Yes. It's pure activity. The first quarter is always a down utilization outcome for some of those other activity-based fees. The second, third, and fourth quarters tend to look a lot alike before you experience the winter misery of people not showing up and going to the ATM.

Thank you, Josh. And again, thank you all for joining this call. We're very excited about our performance in the second quarter, and the prospects looking forward, and we appreciate your interest in that story. I look forward to catching up with all of you at the end of the next quarter. Thank you.

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