Good day, everyone, and welcome to the NBT Bancorp third 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 two, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time.
As a reminder, this call is being recorded. I would now like to turn the conference over to NBT Bancorp's President and CEO, John H. Watt Jr. for his opening remarks. Mr. Watt, please begin.
Thank you, Tanya, and good morning, and thank you for participating in this earnings call covering NBT Bancorp's third quarter 2022 results. Joining me this morning are NBT's Chief Financial Officer, Scott Kingsley, and our Chief Accounting Officer, Annette Burns. In an interest rate environment that is volatile and where economic and macroeconomic conditions are constantly changing, we are extremely pleased with our results for the third quarter of 2022, including earnings per share of $0.90, return on average assets at 1.3%, and return on average tangible common equity landing at 17.1%. Let me take a moment to highlight activity in our business and in the markets we serve.
We are excited to be in a position to support the commercial, retail banking, and other financial service needs of the Central New York market as Micron Technology makes a transformational investment in this region. The announcement earlier this month that Micron will invest as much as $100 billion over the next 20 years to boost production of memory chips represents the largest private investment in New York state history. The new upstate factory will create tens of thousands of jobs. Our franchise is uniquely positioned to play a role in the growth that is being created in the upstate New York chip corridor running through our core markets from Greater Syracuse to the Mohawk Valley and the Capital District. GlobalFoundries, Wolfspeed, and now Micron, all engaged in chip fabrication, have and will continue to generate growth.
We're working hard to support our customers and the communities we serve who will be the beneficiaries of that anticipated growth. As you will hear from Scott later this morning, we are actively and favorably managing our cost of deposits and cost of funds generally, while maintaining high levels of liquidity to fund further loan growth. We continue to enjoy success in our lending businesses with annualized loan growth of 9% through Q3. 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, tight labor markets, and inflation. Our residential solar lending business had a strong quarter, driven in part by the extension and increase in federal tax credits through the Inflation Reduction Act passed in early August.
Our fee-based businesses reported solid results despite headwinds in the fixed income and equity markets. Although we are very mindful that the forward environment is likely to be volatile, we continue to observe a strong consumer. Balances in personal checking accounts have held steady in the quarter, and credit quality in the consumer loan portfolios is very healthy. Delinquency across all consumer loan categories is well below pre-pandemic levels. As we head into the last quarter of 2022, we are well positioned with strong liquidity and capital levels, a diversified business mix, highly effective risk management practices, and a team of experienced professionals. Scott, I'll turn to you for more detail on our performance in the third quarter, and after Scott's remarks, we'll take your questions.
Thank you, John, and good morning, everyone. Turning to the results overview on page four of our earnings presentation. Our third quarter earnings per share were $0.90, which was up $0.04 from the $0.86 a share reported in the third quarter of 2021 and $0.02 a share higher than the linked second quarter of 2022. These results were achieved despite a $2.5 million decline in PPP income recognition compared to the third quarter of last year or $0.05 and a $1.0 million decline in PPP income from the second quarter of 2022 or $0.02 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 liquidity into investment securities, the continuation of historically low funding costs and continued increases in the Federal Reserve's targeted Federal funds rate. We recorded a loan loss provision expense of $4.5 million in the third quarter compared to a provision benefit of $3.3 million in the third quarter of 2021 or 14 cents per share swing. Net charge-offs in the third quarter were $1.3 million or 7 basis points of loans, compared to 11 basis points of loans in the third quarter of 2021, and 4 basis points of net charge-offs in the linked second quarter.
Our reserve coverage increased slightly to 1.22% of loans from 1.20% at the end of June, which provided for loan growth and some deterioration in economic forecasts. The next slide, page five, shows trends in outstanding loans. On a core basis, excluding PPP, loans were up $141 million for the quarter and included growth in both our consumer and commercial portfolios. Loan yields were up 25 basis points from the second quarter of 2022, reflective of higher yields on our variable rate portfolios as well as higher new volume rates. Our total loan portfolio of nearly $8 billion remains very well-diversified and is evenly balanced between consumer and commercial outstandings.
Moving to the slide on deposits, we were down $110 million or 1.1% from the end of the second quarter. During the quarter, we also introduced a short-term treasury product designed specifically for certain customers' excess liquidity that resulted in nearly $100 million of deposits moving off the balance sheet. Our quarterly cost of total deposits increased to 9 basis points compared to 7 basis points in the linked second quarter. Interest-bearing deposits moved up from 11 basis points to 14. The next slide looks at detailed changes in our net interest income and margin. Net interest income increased $16.8 million as compared to the third quarter of last year and was up $6.9 million from the second quarter of 2022, reflective of higher yields on earning assets.
Reported third quarter net interest margin was 3.51%, up 30 basis points from the linked second quarter and 63 basis points higher than the third quarter of 2021. Looking forward, with interest rates expected to continue to rise, 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 our current blended portfolio yields. Although we believe our deposit funding profile is best-in-class, we would expect increased levels of deposit beta in the fourth quarter and going forward. Our balance sheet still continues to be asset sensitive, and as such, we would expect to see incremental opportunities for additional core margin improvement for at least the next couple quarters. The trends in non-interest income are summarized on page 8.
Excluding securities gains and losses, our fee income was down 8% from the third quarter of 2021 to $37.3 million and lower by $4.9 million from the linked second quarter. More broadly, non-spread revenue was 28% of our total revenue in the third quarter of 2022 and remains a key strength and a value driver for NBT. Our retirement plan administration, wealth management, and insurance agency businesses reported year-over-year revenue increases driven by productive organic growth and higher activity-based fees. Comparisons to the linked second quarter were net lower, principally reflective of the inherent headwinds of declining equity market valuations.
Card services income decreased $3.4 million from the third quarter of last year and $4.1 million from the linked second quarter, driven by the bank being 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 card interchange activities. Turning now to non-interest expense. Our total operating expenses were $76.7 million for the quarter, which was $3.8 million or 5.2% above the third quarter of 2021. Salaries and employee benefit costs of $48.4 million were up 9.5% over the prior year and included merit-related salary increases as well as higher performance-based incentive compensation accruals.
Total operating expenses were also $575,000 higher than the linked second quarter of 2022, reflective of one additional day of payroll. 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. We would also anticipate somewhat higher than historical levels of merit-based compensation increases in early 2023. 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 infrastructures. 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 7 basis points of loans in the third quarter of 2022, compared to 4 basis points in the prior quarter. Both NPLs and NPAs declined again this quarter. We are continuing to benefit from our conservative underwriting and have continued to experience higher than historical levels of recoveries. As I wrap up prepared remarks, a couple closing thoughts. We started 2022 on strong footing, and we are pleased with the fundamental results achieved. 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. Tanya?
Certainly. If anyone with a question can press star one one on your touchtone telephone. One moment while we compile our Q&A roster. Our first question will come from Alex Twerdahl of Piper Sandler. One moment. Alex, your line is open.
Good morning, guys.
Morning, Alex.
I wanna start with that, some of your comments on the Micron investment, which I saw a couple weeks ago, and was kind of curious about. I'm glad you brought it up. Seems like $100 billion is a pretty meaningful investment in the Syracuse area. Can you just talk a little bit about sort of, you know, maybe, how that could play out in terms of, initial projects that are being done, and then sort of what kind of, infrastructure might actually need to be, brought in or built in terms of housing and, other things that, you know, could kind of just provide all those jobs that you alluded to. Maybe just kind of bring it back home to us and just talk about sort of your positioning in that market and how you guys are, in fact, positioned well to benefit from it.
Thanks for that question, and we are excited about it, as is the whole geography. It's a transformational announcement. It's a transformational commitment. Those of you who follow NBT know that we are at our best when we're playing our long game, and this is a long game that we intend to be involved in for a long time. A couple of facts about around what is gonna happen here. $100 billion investment in four facilities on a campus in the town of Clay, north of Syracuse. We have a branch network that is ideally positioned in and around Syracuse, and particularly north Syracuse, up to Oswego County, that will be there to serve the additional workforce and the additional population that is projected to grow there.
Initially, 9,000 jobs are likely to be created on the site over the next 20 years. Along with that is a projected 40,000 indirect jobs to support the supply chain, construction, and other, support, necessary to, have in our region a large and sophisticated manufacturing operation like that one. We understand New York plans to spend $200 million on road and infrastructure improvements. That's our sweet spot. We have in our portfolio, contractors who do that work all day long, every day, road work, sewer work, who also are involved in, setting up the electric network. We intend to be there to support them. It looks like we'll see airport expansion.
Micron and New York State will also make $500 million community benefit investment over time up at Syracuse University, another $10 million investment in its semiconductor program. All of that very significant and material. You hit on one of the areas where I think we can participate and plays to our strength, the residential mortgage product in a geography where the acceleration of home building, both multifamily and individual homes, is likely to take off immediately. We're already aware of land speculation around the site here that we know developers are positioning themselves for that growth. We think that on the business banking side, there are lots of opportunities for support businesses here as this project takes off.
We're also committed to the community. We have a team looking at how we can help to develop the workforce that's gonna be necessary to populate this plant and related businesses. We have senior executives who are plugged in at the economic development level, not only in Central New York, but in the Mohawk Valley and down in the Capital District, who also give us visibility into what the needs are. Lots of layers there, lots of opportunity, lots of positive momentum for a geography that has experienced sluggish growth over the last 25 or 30 years.
Thanks. That's a great comprehensive answer there. We look forward to tracking that progress and you know, seeing how it plays out. Next question, Scott. I was hoping that, you know, one of the questions that a lot of banks are getting is just in terms of liquidity, and you kind of touched on a little bit, but, you know, with your securities portfolio and your cash position, can you just talk a little bit about cash flows that are coming off the securities portfolio over the next several quarters and into, you know, I guess early 2023 and 2024, that will help to support the loan growth that you may be seeing?
Sure, Alex. Happy to. As a reminder, most of our investment portfolio is cash flowing instruments. Mortgage-backed securities, CMOs, stuff that is paying down on a monthly basis. I think our anticipation is monthly cash flows off the investment portfolio to the tune of about $20 million.
You know, to a certain extent, you know, just based on where underlying yields are on some of those instruments, we wouldn't expect much prepayment activity or slower than historical terms. I think we're pretty comfortable with 20. To your point, over a 12-month period, you know, a quarter billion dollars of cash flow opportunity. Relative to our liquidity, at the end of the third quarter, we were still a very modest seller of funds to the Federal Reserve at quarter end. We had some days where we were a small borrower of funds, and we've had some days in October where we've been a small borrower of funds. We're managing that very tactically.
You know, I think we know the spots in our deposit portfolio that you know that we probably will have to participate in some slightly higher yields for our customers now that we have been through 300 basis points. If you're prognosticating 3.75 by the middle of next week, it's all happening very fast, Alex, as you know, seven months to get to a 3.75. There won't be anybody on any call that has experience doing that. That's just, you know, a new phenomenon. Do we think that in the next 100 up or the next 125-150 up, our deposit beta will be larger than the one we've reported to date? We absolutely do.
You know, how fast that needs to go, you know, we have a very granular deposit base. Not only do we take a lot of solace in the size or, you know, 35%-37% non-interest bearing deposits, but we really like our interest-bearing checking and interest-bearing savings accounts that are priced, you know, on average, you know, below 5 basis points. Do they need to move up a little bit? They probably do. Do they need to move up to, you know, what is likely wholesale borrowing rates will look like? Absolutely not. That's kind of how we're framing that, Alex. That's why we probably think we get a little bit of margin improvement in the fourth quarter. Maybe that spills into next year's first quarter.
Obviously too early to prognosticate what happens on the funding side for, you know, periods after that.
Great. Thanks. That's my questions for now.
Thank you, Alex.
One moment. Our next question will come from Chris O'Connell of KBW. Chris, your line is open.
Morning.
Good morning.
I think I missed it in the opening comments, but did you give just the exact breakdown of what the PPP and excess liquidity impact was versus last quarter?
Yeah. Chris, PPP for the quarter was only half a cent per share. We're basically through that. That compared to, I think, $1 million of PPP income in the second quarter, and I think $2.5 million in the third quarter of 2021. That's basically I think we're at 99% forgiveness and, or extinguishment of our instruments. You know, we're down to, you know, under $10 million of PPP loans still on the balance sheet. To your question, you know, we had a much lower level of, you know, cash equivalents or overnight short-term investments, mostly sitting at the Fed than we did in the second quarter. That was probably 6-8 basis points of the margin change.
As you probably appreciate that, as the Fed was raising rates, to the extent that we had money at the Fed, it was having a higher yield, you know, versus, you know, the no yield activity we had early in the beginning of the year. So from a practical standpoint, as I just mentioned to Alex, you know, think of our balance sheet as fairly neutral today relative to excess liquidity. We think just natural cash flows off the loan portfolio and the investment portfolio, you know, probably keep us in that straddled neutral stage, you know, for at least a quarter or two. Chris, did I hit that? Or am I missing a follow-up?
Yep. No, that's great. Just on the deposit flows this quarter and kind of, you know, looking ahead at the overall size of the balance sheet going forward. You know, you mentioned the Treasury-linked product. I think there was supposed to be some muni inflows seasonal coming in this quarter. Just what's the outlook, I guess, on, you know, what you're seeing from your customers there and, you know, how much deposit growth, you know, would be your target going forward? I guess, like, you know, what are you willing to, you know, to pay up on that?
Lots to that question. Let me see if I can take that in order. I would tell you that in terms of our deposit base, you know, call it $10 billion as of the end of September, of which about $7 billion resides in non-interest checking, low interest checking, and low interest savings. We're actively managing the other $3 billion. And those include institutional or larger commercial customers that historically have been a little bit more interest rate sensitive than, you know, the broad-based retail customer base.
You know, in terms of retail and small business banking money market funds, we probably think we need to push that up a little bit, to acknowledge the fact that we will have benefited on the asset side, you know, between 300 and 400 basis points very shortly. So we expect some there. We have, you know, a little over a $1 billion municipal portfolio. Your observation is correct. The third quarter for us is normally a municipal inflow quarter. We were closer to neutral this year.
Why I point that out is that I think a lot of the municipalities have also found alternative money market consolidators out there, you know, essentially the brokered world that allows them to keep their money in a money market yield, that's maybe north of 2% or maybe even a little bit higher. We clearly don't have a product on our balance sheet today that gets close to that. What's important for us is to continue to keep the core accounts, you know, core checking, you know, core operating accounts. If the customer takes some of their excess liquidity and takes it off the balance sheet for a handful of months, so be it. We'll have some optionality with those customers.
Similar to what we did with some of our commercial customers on this, you know, short-term laddered Treasury instrument. It was the right thing to do for the customer to give them an opportunity for a higher yield. We just didn't have that instrument on our balance sheet today. When we get a little bit later into the cycle, maybe early next year, maybe we find that that's actually net productive for us to bring some of that back on. Do we think we'll bring it back on at current short-term Treasury yields? Probably not. You know, someplace between where we are today and that number is not out of the question. More than anything, Chris, we were looking to create opportunities for us to own the optionality. I think that's an important feature going forward.
We've had very little in lost customer outcomes. We may have had some excess balances leave our balance sheet. You know, the last thing I'll mention is some of our customers are recognizing that they can use their existing liquidity to actually deleverage a little bit. We had a handful of decent-sized instances of that in the second quarter, or in the third quarter, I'm sorry. There's a little bit of that going on. The customer's figuring out that there's a little bit more there, you know, that they can actually earn. There's a net benefit that's higher by just using up some of their excess liquidity on leverage. You know, kind of a combination. Lots of moving pieces, Chris, but again, we're completely engaged from a tactical standpoint on all fronts there.
Got it. Yeah. That's really helpful. I appreciate the color there. Last one for me. Just on the fee items. You know, I was surprised pleasantly that wealth management held up really well this quarter, given the broader market declines. A little bit of pressure on the retirement plan, I'm sure from similar items. It looks like Durbin kind of came in line with the expectations here, but maybe just given all the moving parts, if you could provide a little bit of an update on those items.
Chris, happy to comment on that. Before we accept your, you know, nice comments relative to wealth management holding up, the third quarter for us has some activity-based billing in it. Services that we provide that we bill for once a year in our third quarter. That's to the tune of about $300,000-$400,000. We were probably closer to neutral for the quarter, which, to your point, given the headwinds in the equity markets, pretty good outcome. Which means we had some decent new asset generation, new account generation that offset some of that headwinds. On the retirement plan administration side, we have actually had some activity-based income this year. You know, plan document changes and stuff that tends to happen every 5-6 years in the cycle.
2022 happens to be a year of that cycle. Some of our decline in the third quarter was just that we had more robust activity in the second quarter. About 40%-45% of the revenues of the retirement plan administration space do have market-based influence attached to them. If the first 50%-55% are, you know, our billing or our revenue opportunity is, sits at, you know, billing for census, that's actually participation in the plan. The other 40%-45% is based on, you know, market yields. We're getting X per participant plus basis points on assets. I mean, I expect that, you'll typically see, you know, the market, our billing cycle runs probably a quarter behind that.
Our billing for the fourth quarter probably is based on, you know, broad S&P outcomes that ended the third quarter. There might be a little bit more pressure on that going into the fourth quarter. Again, we're getting reasonable growth there. People are adding new accounts. On the banking side of fees, you know, what we communicated sometime at the end of the second quarter is that we did make some adjustments to our overdraft non-sufficient funds programs, which we think probably cost us a cent per share per quarter. We experienced a little bit of that in the third quarter. Our estimate relative to the debit interchange outcome was pretty close.
You know, we were saying somewhere between $15-$15.5 million. We're probably still pretty close to that. You know, number of transactions has actually gone up, but obviously, you know, our opportunity was more than cut in half.
Really helpful. Appreciate it. Thanks for taking my question.
Thanks, Chris.
As a reminder, if you have a question, please press star one one on your touchtone telephone. Again, for any questions, please press star one one on your telephone. I would now like to turn the call back to Mr. Watt for his closing remarks.
Thank you, Tanya, and thank you all for participating in our call and for all of your great questions. We look forward next quarter to bringing you up to speed on our full year-end results. With that said, thank you and have a great day.
Thanks, everyone.
Thank you, Mr. Watt. This concludes our program. You may disconnect. Have a great day.