Q4 2022 NBT Bancorp Inc Earnings Call

January 24, 2023

Good day, everyone welcome to the conference call covering MBT 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 slot.

It can be found on the company's website at <unk> Bancorp Dot com.

Before the call begins Mpt'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 and instructions will follow at that time.

As a reminder, this call is being recorded.

Now I'd like to turn the conference over to MPT Bancorp, President and CEO , John <unk> Junior for his opening remarks.

Please begin.

Thank you, Chris and good morning, and thank you for joining our earnings call covering <unk> Bancorp's fourth quarter and full year 2022 results.

Joining me today are <unk>, Chief Financial Officer, Scott Kingsley.

Our chief Accounting officer, and it Burns and our treasurer Joe on desktop.

We achieved superior operating results for the full year of 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 <unk> 86 cents for the quarter and $3 55 for the year, excluding acquisition related expenses and securities losses.

Return on average assets was approximately one 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 were 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 nonperforming 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 in 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 will speed recently announced a new large chip fabrication contract with Mercedes.

MPT 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 <unk> 30 dividend payable on March 15.

In 2022, it's notable that we March 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 a bad.

Dedicated team at <unk> 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.

Thank you John and good morning, everyone turning.

Turning to the results overview page of our earnings presentation, our fourth quarter earnings per share were <unk> 84, and.

<unk> 86 per share excluding the <unk> <unk> 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 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 <unk> <unk> per share difference.

Fourth quarter 2022 loan loss provision was also $3 2 million or <unk>.

<unk> <unk> a share higher than the $4 $5 million provision recorded in the late third quarter net.

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 two 4% of loans from 1% to 2% at the end of September which provided for loan growth.

The next page shows trends in outstanding loan.

Total loans were up $245 million for the quarter and included growth in both our consumer and commercial portfolio.

Loan yields were up 38 basis points from the third quarter of 2022 reflective of higher yields on our variable rate portfolio as well as new higher volume rates.

Total loan portfolio of $815 billion remains very well diversified and it's evenly balanced between consumer and commercial outstanding.

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 seven 2% lower.

The decrease in deposits was primarily concentrated in certain larger more rate sensitive accounts.

The tighter monetary policy inflation and higher rate alternatives, including a ladder Treasury security strategy deployed by our wealth management group for our own customers continued to weigh on balances.

Even though deposit balances declined from 2021 year and 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 base.

This point in the fourth quarter.

The next slide looks at a detailed changes in our net interest income and margin net interest income increased $14 7 million.

Third 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.

<unk> fourth quarter net interest margin was 368% up 17 basis points from the late third quarter, and 60 basis points higher than the fourth quarter of 2021 with.

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 but significant improvements we achieved and net interest margin during 2022.

The trends in non interest income are summarized on the next day, excluding securities gains and losses, our fee income was down 17% from the fourth quarter.

$3 million.

$3 million in the late third quarter, our retirement plan administration and wealth management businesses revenue decreased a combined $1 2 million reflective of chat reflective of challenging market conditions as well as certain seasonally higher revenues in the third quarter. Similarly.

Similarly fourth quarter revenues in our insurance agency are typically lower than the first three quarters of the year and were $450000 below the third quarter.

In 2022 on a full year basis, the company's retirement plan administration business recognized $2 5 million.

Service revenues related to statutory planned documents restatement required 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 are 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 experienced 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 five 9% above the fourth quarter of 2021, and $2 8 million or three 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 two 3% lower than the linked third quarter reflective of one less payroll day in the quarter and more favorable experience in certain of our benefit plans.

The quarter included some higher seasonal costs, including some external services for several tactical and strategic initiatives.

We would 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 of the presentation as.

As I previously mentioned net charge offs were 18 basis points in the fourth quarter of 2022 compared to seven basis points from the prior quarter and.

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.

Nonperforming loans declined again this quarter, we are continuing to benefit from our conservative underwriting that's continued to experience higher than historical levels of recoveries.

As I wrap up my prepared remarks, some closing thoughts.

Already in 2022 on strong footing and are very pleased with.

We achieved.

Net interest income additive results from our diversified fee income line and favorable credit quality outcomes has more than offset higher levels of noninterest expense, which has allowed for productive gains in operating leverage.

Our capital accumulation results over the past several quarters continues 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.

Thank you Sir.

With a question at this time, Ken Crestar, one one on your phone and wait for your name to be announced withdraw. Your question. Please press star one one again, one moment for our questions.

Okay.

And our first question will come from Steve Moss of Raymond James Your line is open.

Good morning.

Good morning, Steve <unk>, 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 continued strong just curious as to.

Expectations going forward.

I appreciate the question first of all with respect to economic development in Upstate New York.

A long term.

Growth opportunity for us and as I've said before MVP is best when we are playing that long game.

Pipelines are going to build over periods of years.

<unk>.

Immediately.

Although.

Under the infrastructure funding Thats been released recently several of our customers have been quite successful.

Oh, receiving awards to be involved in large infrastructure projects.

With respect to the commercial pipeline itself across the seven states it is healthy.

Clearly we.

Did a lot in the fourth quarter or two.

Nick.

A pending pipeline and convert it to close and there is refilling of the bucket going on but we feel pretty good about the opportunities that were given to look at and the diversity of those opportunities.

On the consumer side, there is 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.

No.

On the back half of the year, we will see.

Whether or not the housing market shifts again.

We're watching that very closely.

We mentioned our growth in the Sun gauge.

Lending.

Graham very strong third and fourth quarter.

I think Scott also will talk to that subject.

Expect that to level off.

Now going into this year as our partner Sun gauge Diversifies its funding sources and its actively engaged in that.

The beauty of that is will retain the servicing in all likelihood and there'll be other investors to hold the asset so generally speaking optimistic with those exceptions.

Okay. That's helpful and then maybe just on.

Loan pricing whats the rate on new loans coming on these days and any color you can give there.

Sure so.

Sort of Holistically across the board Steve the.

New loan production is clearly above 6%.

And all of our portfolios.

The.

From a pricing standpoint, I think that.

Discipline in the market around us has been pretty fair as people have started to experience to mainstream and some of their funding costs or Betsy surgery experienced a little bit less excess liquidity on the balance sheet I think some of that discipline is even a little bit more pronounced.

What we're seeing in the market today.

So.

For us going forward from.

From a pricing standpoint to price to the forward curve I think as most people have probably noted.

2022, probably didn't force that until at least the mid year point, a year or maybe even later because of the excess liquidity that exists most banks balance sheet at the time, but.

But I think generally we're not getting a lot of pushback relative to our pricing proposals that are out there today.

And they are certainly at the levels of yield that are meaningfully above the blended portfolio.

On the books today.

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.

How you guys are thinking about the margin I mean, I hear you there is some uptick.

Pick in deposit costs.

But just curious how to think about our next couple of quarters.

Yes.

And for US I think we probably would've 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 will get improvement relative to variable rate assets with those two moves and we're anticipating that.

The question is can we still find the logical sources.

I think thats, 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 imbalances not drops and relationships the drops in balances those have been.

Probably 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.

High fours today.

People with the high surgery acumen somewhere helping and others have.

Got there without us.

Have just gone to other opportunities in our higher yielding so just to come back around to your question.

I think we'd like to believe that NIM.

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.

Okay, great. Thank you very much for all the color.

I appreciate it Steve Thanks for the questions. Thanks, Steve.

Thank you.

One moment please for our next question.

And our next question will come from the line of Alex <unk> of Piper Sandler <unk> Company. Your line is open.

Hey, good morning, guys.

Hey, Brian .

So first off.

Just kind of going back to deposits I was just curious.

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.

So good question.

What we have out there today.

Today, what we're seeing is that.

With other opportunities relative for higher yields it sounds a little bit of pressure on again higher balance accounts to Alex <unk>.

General broad cross section of our deposit base.

Has not been that has not been that influenced by that again level or level of granularity in our deposit base is a huge advantage.

I think relative to where we think competition is going.

Remembering that everybody has the investment portfolio is probably a little bit higher than it was pre pandemic.

No cash flows off the investment portfolio will be important sources of net liquidity not only for us, but probably for everybody.

Today, one can't stimulate that because one is probably in a loss position relative to the front end of some of those.

So with that in mind, I think theres, 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 as a net inflow quarter on the municipal deposit side.

I think we think that as much as they have some other choices as well will still benefit from that.

Okay that sounds looking for are you able to quantify or give us a little bit more color on sort of the trough here.

The.

Some of the deposits you saw that this quarter that you kind of alluded to sort of a 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 couldnt quote at risk.

Alright.

Getting this right Alex.

Deposits debt.

Higher balance deposits that left the balance sheet typically found a wealth management of our short term treasury solution that had yields in the four to four five 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.

Enormous concentration in small group of accounts in fairness.

Other than that Alex I don't know that Theres anything else.

If your question was sort of geared towards what are other people doing in the market for offering.

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 relative to achieving those yields.

Got it.

And then just a point of clarification on the on the expense or on the fees the $2 $5 million that you alluded to that.

Six year cycle is that something that we're going to see fees go down by $2 $5 million in 2023, and then come back in 2028 or how do we can you just maybe explain that a little bit better.

Yes, sure. So there are statutory requirements either within the premise of the risks or.

Or other benefit plan requirements.

That foresight documents to be refreshed on a recurring typically a five to six year cycle. So it would 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 too.

Planned legal requirements is that a 2027 years of 2028 event, probably most likely.

To be more important for that line of business for us.

The run rate of the fourth quarter is probably more indicative of where we would expect 2023 to start before any organic growth opportunities that we might be able to capitalize them.

Okay. So the $2 5 million, what's kind of earlier in 2022 and 2023, the $10 7 million Thats kind of a starting point for the retirement plan administration fee line.

Yes, that's a fair conclusion outs absolutely much more concentrated in the first three quarters I think we sort of finished up that program early in October .

Okay and then just a final question for me I think I saw on the presentation that the 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 it yet.

Well I think it's a function of a couple of factors clearly smart customers with excess liquidity. They are 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.

We have many other components to them and they remain unfunded and are likely to stay on funded so it's kind of a mixed bag there.

And.

I think going forward here.

As excess liquidity moves.

Moves out of the system, we're likely to see incremental borrowing there that we didn't see.

In 2022.

Okay. That's helpful. Thanks for taking my questions.

I appreciate it thanks Alex.

Thank you.

And again, if you have a question. Please press star one on your phone and wait for your name to be announced as a reminder to withdraw your question. Please press star one one again.

Okay.

One moment please for our next question.

Our next question will come from Chris O'connell of K B W. Your line is open.

Hey, good morning.

Yes.

Just following up on.

The deposit flows question.

Having some of the investment portfolio of 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.

Sure.

Chris that's a large piece of our investment portfolio as mortgage backed securities and so both gaslog has slowed down a little bit since rates started to rise but.

But I still think it's safe to think about $15 million to $17 million a month of cash flows off the portfolio.

And.

And that's given where current rates are maybe that accelerates again in the second half of the year, but.

Okay got it.

And I guess along those lines.

Any chance you could quantify some of the commentary around the deposit betas, which.

Hello them extremely well so far.

But you guys are expecting to kind of increase.

Go forward basis, just relative to either last cycle or.

I guess to peers for this cycle.

Yes, so Chris I would kind of frame it like this deposit costs were higher in December than they were in October .

And there will be higher in January than they were in December .

And I think generally.

That marching up effect will happen throughout the quarter.

It certainly would not be surprised if if deposit costs were up.

1% 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 really important for us.

Retain the operating side of those relationships excess liquidity can can come and go from the balance sheet.

Sustaining the operating accounts as always are.

Our first objective in all those.

Mrs.

So I think that's kind of how we're thinking about it.

The alternative for Us and again, we're 92% deposit funded an 8%.

Borrowing funded at the end of the year and Thats 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.

<unk> 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.

Well there'll be a little bit more pressure now with the with short term yields, yes, maybe a little bit more.

But I think thats something that reconciles itself. After you get the stability of rate change.

Okay, Great that's helpful.

And.

And on the insurances.

Services line.

There's a little bit of seasonality between third and the fourth quarter versus the fourth and the first quarter over the years.

Just remind us of.

What that seasonality is or what the expectations for that line is going into the first quarter.

Yes, absolutely interest actually thanks for asking the question because there is.

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 due to the first and the third quarter are stronger and I think that's really centered around effective date to the type of insurance that we originated in our agency.

Whether it's commercial insurance property casualty on the retail side or benefits related stuff.

Unusual for people to make changes to their plan or have renewal dates that tend to be January one July one centric.

And each of those cases.

So again just back to your question around seasonality, we normally see a 1% to <unk> improvement in insurance and wealth management combined in our first fiscal quarter compared to the linked fourth quarter. However, it is not unusual for us to incur another cent per share of costs on the utilities and maintenance side in the winter.

Just relative to the geography that we live in and quite frankly, I think most people remember this that we typically incur three to four a share in the first quarter associated with elevated payroll tax obligation and some equity compensation that just tends to be frontloaded.

So past that from a seasonality standpoint.

Not anything thats substantial or that sticks out for us.

I'll make a comment.

FERC, but 2023 has 65 payroll days in each of the four quarters.

It's highly unusual normally there is 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 a little bit easier to model next year.

Okay great.

And then lastly, I mean credit Seldon.

Super well so far.

It doesn't seem to be a ton of movement in the buckets.

You guys this quarter, but generally.

Can you just give us an outlook on what you guys are seeing in your markets.

And any kind of areas or cause of concern in either the commercial or the residential portfolio as you look out into 'twenty three.

Well I'll take that one thank you.

Last week, we completed a comprehensive review of <unk>.

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 portfolio.

That said.

I would expect as we head into a more normalized environment that there'll be a reversion towards.

<unk>.

Pre pandemic 2019 levels over time, certainly not immediately but overtime.

And we will see that initially in the consumer portfolios.

We don't see it now but it'll come.

Commercial portfolio, a very strong business banking portfolio very strong.

I don't think Theres, a nonperforming loan in excess of $1 million in the total credit book.

The sustainability of that.

It will probably revert back to a more normalized.

Nonperforming level is well over a.

A longer period of time, so we feel good about it now we don't see cracks.

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 loan deposit I'm sorry, the ltvs.

In each one of those asset classes in CRE so pretty.

Pretty stable there.

Okay.

Got it.

Yes, and let me add to that real quick.

Yeah. Our philosophy has been that we will provide a provision for net charge offs and we will provide a provision for loan growth.

And 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 we.

We have not wavered in that at all so coverage ratios of 1% to 4% I think you'll find are probably slightly above our peer group.

And.

And we think that's appropriate and judicious certainly given the dynamic of.

The economic conditions that we expect to go forward with.

Got it I appreciate the color and thanks for taking my questions.

Thank you Chris Thanks, Chris.

Thank you.

Hello moment. Please next question.

Our next question will come from the line of Matthew Breese of Stephens, Inc. Your line is open hi.

Hi, good morning.

Okay.

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 noninterest bearing is at risk here.

And could we go back to levels, we saw pre COVID-19 or even prior.

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 everyday north of three or 4%.

So I would frame it this way Matt it's a really good question.

Oh by the way to 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 DDA 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 of 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.

It just for them if you got excess balances of 25 or 50 Grand what is the net differential we have some products in our deposit portfolio to address.

Moving people up over time.

<unk> based products.

So I think those will be effective they have historically been affected.

I think what you're even seeing it that our customers still have higher than historic levels of pure checking balances, but they are becoming a little bit better at moving those off into money market type products, even in ROI, even at our own deposit portfolio.

So Matt I think I'd come back around to say I think on a peer comparison or 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 expectation and in fairness reminding some of those large customers how low they are borrowing.

Rates still are.

It will be something that will continue to be a challenge for us and a task for us, but truly that's about managing relationships and I think will be really effective at that over time.

Got it Okay, and then just acknowledging that the loan to deposit ratio ticked up.

Still still well below a 100% but at 86.

Yes.

Any limitations there you put on yourself or any any any ceiling you'd like us to keep in mind and at what point does it start to impact.

Your loan growth outlook.

So let me start there and then Scott will pick it up I think historically antibody installed MPT for a long period of time knows that we have very successfully operated this company pre pandemic that loan deposit ratio in the low 90%.

We feel comfortable being in that territory I don't see us getting there very fast but.

That's not a place that.

We are.

Adverse to being if that loan demand presents itself at the right yield.

So we still view that we've got headroom here.

And.

Loan demand is strong we'll keep funding.

I think about the only add I would add.

One 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 as a result, 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.

Well as effective yield performance.

It's also a borrower base that has a meaningfully higher than average.

FICO score so we like the borrowing base there.

But I will say that.

As that business has matured and our partnership with some gauge has matured getting to more forward flow.

Opportunities for them warehouse lines of credit to 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 proliferate 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 of hundred million dollars of cash flows coming off our investment portfolio, but the portfolio of $6 million to $800 million larger than it had ever been.

Over time that will also be a source of net liquidity for us.

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.

It's a little bit more expensive than the deposit base, but not a bad thing.

Understood Okay.

As you can imagine at this stage in the cycle and everything going on during Covid with.

Car prices, we're getting more questions on on exposure there could you just remind us within that dealer finance book.

How much is indirect auto versus floor plan lending and then.

Kind of stratify the FICO.

<unk> you have.

Sure absolutely.

So that portfolio Thats, just under $1 billion is all indirect auto.

Very very small amounts of dealer finance.

Our floor plan financing, just some really older legacy legacy less than $20 million.

So most of that is indicative.

Indicative of that in terms of FICO band for indirect auto.

And average FICO above 750.

And to your point.

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 paydown of their instruments.

So I think from a loan to value standpoint, we're not concerned where we are today.

There is still a little bit of a backlog relative to vehicle inventory, especially in our markets that don't enjoy a lot of public transportation.

Jackson work.

So from a commentary stable I'd say not concerned about that portfolio.

Still being able to manage the customer outcome, historically that that employment characteristics or unemployment characteristic and the performance of that portfolio have been linked at the hip.

So.

So from a productive standpoint, we think that portfolio will still be something that.

Meaning to be additive to our net net all year long.

Got it okay. Thank you and last one from me Scott You had mentioned that you expect a slight migration higher on overall expenses from 2023 I was hoping you could just be a bit more specifically are we looking at low single digits or mid single digit expense growth this year versus next.

So yes, so deal a Todd question, yes, if I framed it this way I would tell you that.

The midpoint between our third quarter operating expenses in our fourth quarter operating expenses is probably a really good baseline before we start to talk about mirrored increases we expect sort of a late first quarter mirror change for our folks in the neighborhood of 4% to 5% on what we think about that is the combination of <unk>.

Merit changes and some compression needs that we have.

With the 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 were a little bit above that going forward as it relates to the rest of our non operating base.

Maybe expect a little bit more utilization of some technology tools on a full.

A fully incurred basis next year that push 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.

Yeah.

Perfect I appreciate it that's all I had thanks for taking my question Madam, Let me give you one more someone just reminded me our friends at the FDIC or trying to collect a little bit more on a per deposit dollar adjusted basis next year, we think that probably cost us four cents a share next year.

In terms of that higher base and I think this is it goes without saying, but as a reminder, in the first half of the year. We saw a negative comparison because of the durbin impact because obviously that started for us in July so $8 million less in debit interchange.

<unk> revenues in the first half of the year is our expectation compared to 2021.

Got it Okay do you have that.

<unk>.

What is that on the dollar amount of where we are relative to deposits in terms of basis points.

Yes, so it's $2 $2 million.

<unk> expense in my head that must mean is two or three basis points.

Got it okay. Thank you Scott. Thank you John I appreciate you taking my questions. Thank.

Thank you Matt Thanks, Matt.

Thank you.

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

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.

Thank you Mr. Watt. This concludes our program you may now disconnect and have a great day.

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Good day, everyone welcome to the conference call covering MBP 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 MBP Bancorp Dot com before.

Before the call begins Mvp'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.

The conciliation for these numbers are contained within the appendix of today's presentation at.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

As a reminder, this call is being recorded.

I'd now like to turn the conference over to MBT Bancorp, President and CEO , John <unk> Junior for his opening remarks.

Please begin.

Thank you, Chris and good morning, and thank you for joining our earnings call covering and BT Bancorp's fourth quarter and full year 2022 results.