NBT Bancorp (NBTB) Q2 2022 Earnings Call Transcript

NBT Bancorp (NBTB 3.39%)
Q2 2022 Earnings Call
Jul 26, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone. Welcome to the NBT Bancorp's 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.

[Operator instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to NBT Bancorp president and CEO, John H. Watt Jr., for his opening remarks. Mr.

Watt, please begin.

John Watt -- President and Chief Executive Officer

Thank you, Josh, and good morning, everyone. Thank you for participating in this earnings call covering NBT Bancorp 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 an ROATCE of 17%.

I'd like to take a moment here to highlight activity in our businesses. Loan growth continues 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 observed a very strong consumer balances in personal checking accounts grew in the second quarter. And credit quality 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 the 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 of our with respect to our financial performance.

And following Scott's remarks, we're happy to take your questions.

Scott Kingsley -- Chief Financial Officer

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 a $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 a $162 million for the quarter and included growth in both our consumer and commercial portfolios. Our total PPP balances as of June 30, we're 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 in fees associated with PPP lending during the quarter, and we have just $400,000 in unamortized fees remaining. Excluding PPP recognition, loan yields were 16 basis points up 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 as compared to the second quarter of last year and 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 rates 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 in the beginning, beginning in the third quarter. our balance sheet still continues to exhibit a meaningful level of assets sensitivity.

Moving to the trends and 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 link 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, the bank 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 opportunity 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 merits 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'd 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 reserves 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Alexander Twerdahl with PSC. You may proceed with your question.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey. Good morning, guys.

John Watt -- President and Chief Executive Officer

Good morning.

Scott Kingsley -- Chief Financial Officer

Good morning, Alex.

Alex Twerdahl -- Piper Sandler -- Analyst

First off, I was just hoping you to add a little bit more color on the momentum in the low -- 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 4.8% book yield?

John Watt -- President and Chief Executive Officer

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 could go from here. It's been very strong Alex as you know, in the first queue, we experienced growth in excess of what we would normally experience in the markets we serve and you know 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. You know, I think we would observe that developers are slightly more cautious as they think about multifamily projects going forward here. But we have several that are in process now and will continue to build out over the next 12 months and the demand there continues to be high in those markets.

On the C&I side, we see business owners, expanding their plant capacity, 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 and second cue slight moderation I would suspect toward the back half of the year driven by higher rates. But the pipelines are still active and moving toward closing through third cue and toward the end of the year. Scott, why don't talk yields a little bit.

Scott Kingsley -- Chief Financial Officer

Sure, Alex and 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 hit had interest rates in the low fours because we were making pipeline commitments that were out there prior to that. As the quarter came to an end, very few of our assets we're 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 the where most assets that are attractive for us are in the 5% level.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. That's really helpful. And then with respect to credit you guys did put a little bit more into the ACL this quarter. Is that -- can you just talk through kind of the thought process there? It doesn't seem like anything you're saying which suggests that that was warranted, but obviously there's a lot of uncertainty on the horizon for the back half of the year.

Maybe just kind of what drove that specifically drove that ACL increase for you guys.

Scott Kingsley -- Chief Financial Officer

Yeah. 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 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, 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. OK.

Alex Twerdahl -- Piper Sandler -- Analyst

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 that you guys are over $10 billion. And obviously, you guys have been very I guess, cautious on approaching the transaction. I'm just curious with the rapid change in interest rates and all the volatility in the market if the transaction today is something that you could pursue.

John Watt -- President and Chief Executive Officer

So great question, Alex. And 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 second Q, 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 uprate environment means and there will be some adjustments in understanding of what they're 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 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, a short answer, no change in strategy, just a slight pause because everybody is trying to figure out what this rate environment means to them.

Scott Kingsley -- Chief Financial Officer

And Alex, I'll follow that up with this is to John's point, by any sort of ALCO Junkie's perspective, 225 basis points in four months is a shock, right? That's a shock to the rate structure. So what does that mean? So for purposes of our consideration of potential partners, we've had to look at the impact on beginning regulatory capital of impacts of AOCI reductions and potential interest rate marks on loan portfolios. Certainly, it 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 does that do to opening equity.

What does that do to opening capital ratio levels, and we need to be responsible with that. And 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.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. Thanks for taking my questions.

Scott Kingsley -- Chief Financial Officer

Thanks, Alex.

John Watt -- President and Chief Executive Officer

Thank you.

Operator

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

Chris O'Connell -- Keefe, Bruyette and Woods -- Analyst

Good morning. Hi, guys. So I wanted to 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.

Was 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 sort of 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.

Scott Kingsley -- Chief Financial Officer

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 sort of COVID 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, we're not able to get through some of those. Second quarter, different story. And so just the pure sort of transactional and activity level expenses were higher in the second quarter because it's stuff we didn't do in the first quarter. Kind of add to that, an additional payroll day of 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 have 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-run rate going forward.

Chris O'Connell -- Keefe, Bruyette and Woods -- Analyst

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

Scott Kingsley -- Chief Financial Officer

Excellent point. And thanks for asking the question, Chris. So to your point, what we had was a pool of brokered money market funds that matured in the second quarter that we actually secured at the early stages of the pandemic from a liquidity standpoint. And clearly, we didn't end up needing that.

But obviously, in those particular cases, you just run those to maturity. And the other $300 million-ish drop in deposits for the quarter, seasonal outflows on the municipal side represent the lion share of that. What we also saw is that within our -- whether it's a municipal or non-for-profit portfolio, there are meaningful amount of deposits with some rural healthcare enterprises. They spent some of their money in the second quarter.

A lot of that was either pandemic-related support or other government assistance programs that they all either applied for or were granted as part of the pandemic, some of the incremental costs they incurred in the last couple of years, there was actually a drawdown of some of those funds. That -- just on our healthcare entities alone that was close to $75 million in the quarter. I don't think we think that piece is coming back in the near term. The third quarter is typically a net positive for us on municipal deposit flows.

The state for in, people collect school taxes in the month of September. So normally, we have an uptick there. I will observe this too though, at the same point in time, to talk about customer deposit flows. What's happened since we've had this rapid changes in rates over the last four months is that the money market aggregators are back in business.

So those people that did not participate in the market relative to other options for some of our customers. Those firms are getting the band back together and they're doing it in short order because of the level of volatility. So there are offerings out there with some of the aggregators that are meaningfully above where our core rates are relative to money market opportunities. Do we think some of our larger institutional and municipal customers may avail themselves of some of that higher rate before we'll get them to that higher rate, probably.

Do we think it's a meaningful piece of our $10 billion deposit portfolio? We don't. So I think that's how we're thinking about it, Chris. The beauty of us is we're still adding net new units from a depository standpoint and that's the important thing. Adding new accounts on a net basis is always the point of reference for us.

Account balances can change over time. But as long as you're adding new accounts, you're probably progressing.

Chris O'Connell -- Keefe, Bruyette and Woods -- Analyst

OK. Got it. That's helpful. And then kind of just piggybacking there.

I hear you 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 color as to the magnitude of what you guys are thinking would be helpful.

Scott Kingsley -- Chief Financial Officer

Sure. And I would probably do a little bit of bifurcation within our deposit portfolio and tell you that we have in the neighborhood of $7 billion worth of DDA checking and savings deposits that we don't see the rate movements there being very substantial at least for the next six months. So what are we managing? We're managing that other $3 billion in deposits where the customers are a little more interest rate sensitive. And in fairness, I would expect to be having some discussions with some portion of that part of the deposit base about funds rates being up 225 basis points, I think, as of tomorrow.

And geez, we should maybe get some modest piece of that. And we'll be very deliberate about that, Chris. And to your point, we love our starting points. Base costs at 7 basis points with going into the quarter of $300 million of net liquidity, we can -- we have the affordability to take obvious, very thought-out thoughtful ways to go back to customers and say, what's the definition of excess liquidity and what's the definition of core accounts?

John Watt -- President and Chief Executive Officer

And if I could follow up on that Chris, if I could follow on that. It's in the DNA of this company to be very thoughtful about how we manage the deposit book in an uprate environment and we've had great success with that in the past. It's an integrated approach on the front line 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 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, and 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.

Chris O'Connell -- Keefe, Bruyette and Woods -- Analyst

Great. Yeah, I hear you. And on the fee side of the business, I was 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 what -- if you could quantify the contribution is significant from the HA Rogers announcement.

Scott Kingsley -- Chief Financial Officer

Chris, I'll take a shot at that. So first and foremost, we 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 kind of 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, to try to expand our 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.

And 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 the full scope of NBT products.

Chris O'Connell -- Keefe, Bruyette and Woods -- Analyst

Great. Appreciate you taking my questions. Thanks.

Scott Kingsley -- Chief Financial Officer

Quick on this, I missed -- I forgot the small insurance agency that we acquired in New Northern New York is just that. It's small, but it fits us very well. It's -- we have common customers on the banking side. The principle of this business has been an NBT customer and an NBT advocate for many, many years and we're just happy to be able to expand that outcome.

We think that's a great opportunity for fold and in fairness, if we could find a few more of these, we'd be happy to do them.

Operator

Thank you. [Operator instructions] Our next question comes from Matthew Breese with Stephens. You may proceed.

Matthew Breese -- Stephens, Inc. -- Analyst

Good morning.

John Watt -- President and Chief Executive Officer

Good morning, Matt.

Matthew Breese -- Stephens, Inc. -- Analyst

Yes. First one for me, just in the appendix of the presentation, you showed 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.

Scott Kingsley -- Chief Financial Officer

All right. So let's take a shot at the easy one first, and then we'll work on the duration question, Matt. We think there's about $2 billion worth of pure variable. So when the Fed funds changes and that presumably moves through primary changes or LIBOR SOFR changes quote, "We get promoted later that day." Now, we get really -- does we do our -- do we experience that benefit from our customers immediately.

There's probably a 1-month lag just based on where the customer is in their billing cycle. So in some cases, you don't get that adjustment until, "The next billing cycle." But I think what we're using that is essentially that $2 billion number. And to kind of lead into your follow-up to that would be, clearly, the Fed funds changes that have happened from March to June, we have not yet experienced the full benefit of those, which we will in the third quarter as well as the rhetoric around whether we're getting 75 or 100 tomorrow. So that would be the start point.

I think generally, I'll say this about from a duration standpoint. Generally, we have a lot of five year repricing type instruments in our commercial loan book. We may be offering terms that go out 7 to 10 years on a fixed side in certain cases. But usually, the duration of those instruments don't last that long anyway.

And using the customers back in front of us with another initiative or another opportunity long before we get to that point. So cash flows are meaningful and I think we've said this before cash flows off our loan portfolio in terms of natural amortization and maturities are in the neighborhood of $2 billion a year. So we will have that opportunity, obviously, to reprice at higher new volume rates as rates continue to move up.

Matthew Breese -- Stephens, Inc. -- Analyst

Understood. OK. 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 for 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?

Scott Kingsley -- Chief Financial Officer

Yes. So for the duration of the year, so let me -- again, break that into a couple of different buckets. Part of the second quarter's net interest margin expansion came from the fact that we had a meaningful drop in cash equivalents. We don't have that same drop in cash equivalents coming in the third quarter.

But to your point, we will get the full quarter impact of some of those changes in Fed funds rates. So the sheer impact as I said was in and around 15 or 16 basis points on loan yields. I think we could see that happen again in the third quarter. So, I think that would be our expectation.

I think what's also going to happen -- and maybe it's not a third quarter outcome, but we're going to get some level of response necessary on the deposit beta side. That's probably more in the fourth quarter. We're a third of the way through the third quarter then we can probably tell you, haven't had to do much yet. But that's coming and we need to have productive conversations with some part of our employee or our customer base that addresses that and that's coming.

So do I think 21 basis points would be happy to book that today or 26 basis points. Probably not all of that, but I think a decent portion of it.

Matthew Breese -- Stephens, Inc. -- Analyst

OK. And then I noticed that you -- the loan portfolio breakout is a little bit different this quarter. Specialty lending is now broken into resi solar. And it looks like other consumer want 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?

Scott Kingsley -- Chief Financial Officer

Yeah. So you're right. We did do that. And during the quarter, we had some productive conversations with investors, folks like you, and potential investors that were looking for a little bit more clarity because we've obviously have had some real success with residential solar.

And we really like the platform that we're partnered with our friends at Sungage and that's been highly productive for us. So we continue to look at that and say that's opportunistic. What's left in the poll? We still have some assets from the Springstone relationship that we've had historically. To your point, they have had higher than our blended book yields historically.

But we've also experienced a little higher level of net charge-offs in that portfolio and 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.

John Watt -- President and Chief Executive Officer

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 for them.

Matthew Breese -- Stephens, Inc. -- Analyst

OK. 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, it sounds like it's in runoff.

Could you give us some idea of the pace of runoff?

Scott Kingsley -- Chief Financial Officer

Yes. So pace of runoff on that portfolio is probably like a two to three-year duration. And maybe 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.

And remember, that's a national platform, so 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 dictate those outcomes. So we're very happy with the credits that we're putting in there. And as a reminder, then 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. So, we like the attributes of that. Could that grow? Again, at the pace that we've experienced over the last four or five quarters for another couple of quarters, there's a potential for that. I think it will 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 is 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.

Matthew Breese -- Stephens, Inc. -- Analyst

And then my last one, I asked another Upstate New York made 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, 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?

John Watt -- President and Chief Executive Officer

So I think I said in my comments upfront, Matt, that we have not observed through the end of second quarter any deterioration in the consumers behavior or in the consumer credit portfolios, we saw growth in consumer checking accounts. With that said, we're very aware that the proportion of the annual pay or the weekly paycheck allocated toward 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 oil, propane, fuel distributors who were close to -- who obviously are also watching that same behavior.

And 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. So we'll watch it. I think Scott said it earlier, consumer credit from a past due nonperforming and charge-off perspective can't get any better than it is today.

So will there be an eventual reversion to the meeting, the traditional levels of performance of those portfolios over time? Sure. I would expect that would 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.

Matthew Breese -- Stephens, Inc. -- Analyst

Got it. Well, that's all I had. I appreciate you taking my questions. Thank you.

John Watt -- President and Chief Executive Officer

Thank you, Matt.

Scott Kingsley -- Chief Financial Officer

Thanks, Matt.

Operator

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

Alex Twerdahl -- Piper Sandler -- Analyst

Hey. Just one quick sort of nit picky follow-up question with respect to Durbin kicking in the third quarter. The ATM and debit card line has kind of bounced around a little bit over the last couple of quarters is the $3.7 million reduction, should we be using 9.75 from this quarter as the starting point from that or is that -- does that number include something that maybe is not going to recur?

Scott Kingsley -- Chief Financial Officer

So Alex, within that line item, it is also true sort of ATM utilization fees that we get when our noncustomers that aren't ours end up hitting some of our ATM sources. I think when we look at that 3.7, that's probably a number that we looked at and said, what were our run rate for the first half of the year. And I think we think somewhere between $7.4 million and $7.5 million is likely to be the outcome in the back half of the year. So hopefully, that helps you from a solving of that.

But there is other stuff in there than just pure debit interchange.

Alex Twerdahl -- Piper Sandler -- Analyst

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

Scott Kingsley -- Chief Financial Officer

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

Alex Twerdahl -- Piper Sandler -- Analyst

Got it. All right. Thanks for taking my follow-up.

Scott Kingsley -- Chief Financial Officer

Thanks, Alex.

Operator

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

John Watt -- President and Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

John Watt -- President and Chief Executive Officer

Scott Kingsley -- Chief Financial Officer

Alex Twerdahl -- Piper Sandler -- Analyst

Chris O'Connell -- Keefe, Bruyette and Woods -- Analyst

Matthew Breese -- Stephens, Inc. -- Analyst

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