Good day, and welcome to the TrustCo Bank Corp NY Earnings Call and Webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press s tar and then one. To withdraw your question, you may press star and two. Before proceeding, we w ould like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by the safe harbor and forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results and trends differ materially from those set forth in such statements due to various risks, uncertainties, and other factors.
More detailed information about these and other risk factors can be found in our press release that preceded this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-K and as updated by our quarterly report on Form 10-Q. The statements are valid only as of the date hereof, and the company disclaims any obligation to update this information, except as may be required by applicable law. Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead.
Thank you for joining us this morning to hear more about our very solid second quarter results. I'm Rob McCormick, the CEO of the bank. Mike Ozimek, our CFO, Scot Salvador, and Michelle Simmons join me on the call today. Michelle manages our residential mortgage portfolio, so we thought it would be nice for you for her to provide a direct report. I will hit the highlights then turn it over to Mike O. for a lot of detail. Scott will cover the loan portfolio, and Michelle will talk about mortgages, leaving time for questions. The second quarter here at the bank was very solid. Our net income, $17.9 million, was up significantly over the same period last year and the first quarter of this year. It might even be a record.
Our net interest income, over $43 million for the quarter, was greater than all periods reported. Certainly, the Fed action helped with this, but we have also been able to put some money to work in our loan portfolio, which was up to over $4.5 billion at quarter end. This is up almost $200 million over last year. As usual, most of the growth happened in our residential mortgage portfolio. We are encouraged by the activity in our home equity and commercial loan portfolios. I think most of you know installment lending is not a large part of our business. Deposits also continued to grow in the second quarter to just under $5.4 billion. We continued the trend of growing lower cost core accounts of being less dependent on time deposits.
For the most part, the growth in time accounts was the result of a shift in consolidation of accounts from other categories. Shareholders' equity grew to just under $595 million. Our financial service department continues to be very active. That had a decent quarter, comparable to the same quarter last year. Our loan portfolio performance was strong. Non-performing loans to total loans was 0.41, and non-performing assets to total assets was 0.31. The loan loss reserve was 1% of total loans, sufficient to provide a coverage ratio of 2.4x . Our ROA was 1.15%. Our ROE was 12.08%, both better than all prior periods reported. Our efficiency ratio was under 52%. Margin expanded to 2.83%. We continued to pay a healthy dividend.
Our payout ratio was just over 37%. Capital ratios are strong and improving. We continue to operate the same 144 full-service offices. We are very proud of our results and look forward to the rest of the year with great optimism. Now I'll turn it over to Mike O. He will detail the results. Scott will cover loans. Michelle will talk about mortgages. We will respond to questions. Mike.
Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the second quarter of 2022. As we noted in the press release, the company saw a net income of $17.9 million in the second quarter of 2022, an increase of 23.8% over the prior year quarter, which yielded return on average assets and average equity of 1.15% and 12.08% respectively. Average loans for the second quarter of 2022 grew 4.6% or $196.2 million to $4.5 billion from the second quarter of 2021.
As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased $202 million or 5.3% in the second quarter of 2022 over the same period in 2021. The average commercial loan portfolio decreased $15.9 million or 7.4% over the same period in 2021. Total average investment securities, which include the AFS and the HTM portfolios, increased $62.9 million or 15.1% during the second quarter of 2022 over the first quarter of 2022. During the same period, the bank had approximately $16 million of pooled securities paid down through maturities totaling $5 million and purchased approximately $133.7 million in securities.
For the second quarter of 2022, the provision for credit losses was a credit of $491,000. This includes a credit to the provision for credit losses on loans of one million dollars as a result of improving unemployment and housing price forecasts and is offset by a provision for credit losses on unfunded commitments of $509,000 as a result of increases in unfunded loans. The ratio of the allowance for loan losses to total loans was 1% as of June 30, 2022, compared to 1.15% as of the same period in 2021. As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which has continued to enable us to produce consistent, high-quality recurring earnings.
Our investment portfolio is and always has been a source of liquidity to fund loan growth and provide flexibility for balance sheet management. As a result, we held an average of $1.1 billion of overnight investments during the second quarter of 2022, a decrease of $24.8 million compared to the same period in 2021. Given the elevated level of cash and the changing interest rate environment, the bank will continue to evaluate investing excess liquidity into the market. On the funding side of the balance sheet, total average deposits increased $153.1 million or 2.9% for the second quarter of 2022 over the same period a year earlier.
The increase in deposits was a result of a $48.7 million or a 6.7% increase in average money market deposits, a $181.9 million or 13.2% increase in average savings deposits, a $61.3 million or a 5.3% increase in interest-bearing checking account averages, and a $90.8 million or 12.1% increase in average non-interest-bearing checking balances. These are partially offset by the decrease in average time deposits of $229.5 million or 19.2% over the same period last year. During the same period, our total cost of interest-bearing deposits decreased eight basis points from 15 basis points. This was primarily driven by a decrease in time deposits to 22 basis points from 42 basis points over the same period last year.
As we move into the third quarter of 2022, the bank has approximately $199 million in CDs that will mature at an average rate of 12 basis points. In the fourth quarter of 2022, approximately $286 million in CDs will mature at an average rate of 20 basis points. In total, during the second half of 2022, approximately $485 million in CDs will mature at an average rate of 16 basis points. The increase in the Fed Funds target rate will have an impact on the CD pricing as we move through the rest of 2022 and beyond. Our financial services division continues to be a significant recurring source of non-interest income. They had approximately $909.9 million of assets under management as of June 30, 2022.
Now on to non-interest expense. Total non-interest expense, net of ORE expense, came in at $24.9 million, up $2.2 million compared to the first quarter of 2022, and at the low end of our estimated range of $24.9 million-$25.5 million. The increase from the prior quarter is primarily a result of a decrease in salaries and employee benefit expense due to a true-up to the incentive compensation accrual upon payout in the first quarter of 2022. ORE expense net came in at an expense of $74,000 for the quarter as compared to expense of just $11,000 in the prior quarter. Given the continued low level of ORE expenses, we are going to continue to hold anticipated level expense to not exceed $250,000 per quarter.
All the other categories of non-interest expense were in line with our expectations for the second quarter. We would expect 2022's total recurring non-interest expense, net of ORE expense, to be in the range of $24.9 million-$25.5 million per quarter. The efficiency ratio in the second quarter of 2022 came in at 52% compared to 56.9% in the second quarter of 2021. Finally, capital ratios. Consolidated equity to assets ratio was 9.55% for the second quarter of 2022 compared to 9.45% in the second quarter of 2021. The bank continues to be proud of its ability to maintain shareholder value during these challenging economic times. Book value per share at June 30, 2022 was $31.06, up 3.5% compared to $30 a year earlier. Now Scott will review the loan portfolio for non-performing loans.
Thanks, Mike, and good morning. For the second quarter, total loans increased by $76 million. The actual numbers are 1.7%. Year loans have risen by $191 million or 4.4%. The growth continued to be centered in our residential portfolio. On the quarter, residential loans grew by $68 million or 1.6%. For the year, the increase was just under 5% or $204 million. Commercial loans grew by $7.5 million on the quarter after decreasing by $14 million year-over-year, due primarily to SBA PPP paydowns. Purchase money business and residential loans remained active on the quarter, with our Florida market continuing its especially strong results. Home equity credit line activity has also picked up with the rise in long-term fixed rates.
While increasing interest rates and general economic conditions will undoubtedly have an effect on the marketplace as we move forward, our results to date in securing purchase business continue to be solid. Michelle will provide additional details in her presentation on overall loan activity levels and efforts. Interest rates continued to edge higher in the quarter, and our current 30-year base rate is at 5.49%. Our loan backlog at quarter end was strong and reflects the changing market dynamics. It is up both from the first quarter and the same point last year. Refis are at very low levels in the backlog. The vast majority is made up of purchase money mortgages with a smaller amount of home equity products. Asset quality measurements remain positive. Non-performing loans decreased from $19.4 million to $18.7 million on the quarter. This is down from $20.8 million a year ago.
Non-performing assets also decreased and have dropped from $21.1 million to $19.4 million year-over-year. Early-stage delinquencies remain low, and charge-offs again posted a net recovery of $107,000 on the quarter. The coverage ratio or allowance for loan losses to the non-performing loans now stands at 242% versus 238% last quarter. I will now turn it over to Michelle for additional information on our loan portfolio.
Thank you, Scott, and thank you for the opportunity to discuss the bank's residential lending operation. The refinance market has decreased considerably over the past several months, but loans for new construction are on the rise. All regions are contributing to the backlog for loans pending closing, but our greatest loan growth is in Florida. Another area where there is an uptick is in our home equity products. With the option of variable or fixed rate, we continue to see that portfolio expand with new loans as well as through increased utilization of existing lines. Not surprisingly, we are also seeing increased interest in our adjustable rate products in all of our operational footprint. To remain competitive, we are always looking for fresh ideas for new products and for enhancements to existing ones.
For example, we have recently implemented our Hometown Hero mortgage program for active duty and veteran members of the military, police officers, and firefighters. This unique product is one of the ways we show appreciation for the vitally important segment of the communities that we serve. It offers attractive incentives, and we have seen much interest in it. Overall, being a portfolio lender with a variety of products, charging no private mortgage insurance, offering very competitive rates, all with low closing costs, positions us to do well in every market. Now, I'll turn it back to Rob.
Thank you, Michelle. We're happy to answer any questions you have.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question for today comes from Alexander Twerdahl from Piper Sandler. Alex, your line is now open.
Hey, good morning.
Hi, Alex.
Morning, Alex.
First off, you know, you guys historically, you know, mostly put on the one to four family and HELOC picked up a bit this quarter, which I guess makes sense given the rates and kind of uncertainty around, you know, what's gonna happen with rates and also the economy from here. In terms of sort of future growth, I mean, is this still gonna be predominantly one to four family or do you think it's gonna be more of a kind of an equal mix shift with that HELOC product or the home equity product making up a much bigger component of growth over the next couple quarters?
Well, the home equity product, we used to be a leader in the home equity area many, many years ago, Alex, b ut that kind of went out of favor for a period of time as a product. We've seen some new interest in it, which we're happy about. It's a prime-based product. We underwrite them the right way. We underwrite them to 80% loan to value, so we are happy to pick it up. We don't ever see it eclipsing the residential first product, though. It's a nice supplement, a nice second source, but we never see it really taking over the residential first mortgages.
Okay. What's the? I think you said 5.49% on the first liens. What's the current rate on a home equity loan right now?
Well, for a teaser rate for the first one year at 3.49, Alex, and then it goes to a fully indexed prime even.
Okay.
We tried to go to a lower rate with six months, but people like the one year teaser.
Yeah.
If they pay X amount of dollars, if they take $7,500, we pay the closing costs with a three-year recapture so that if they pay the loan off within the three years, we get the money back for the closing cost.
Got it. Okay. Can you talk a little bit about what you're seeing in terms of just any pressures on deposits in any of your markets? Certainly, deposit betas I think were negative this quarter, which is awesome to see. You know, with rates going higher, I think, you know, many investors and analysts are assuming that deposit beta is going to start picking up more meaningfully in the second half of the year. I'm just curious what you guys are seeing and if there's any differences between the Florida and the New York markets.
Yeah. I mean, we're hearing the same things. I have to say we've had a probably a modest amount or a slight amount of pressure on the deposits as of right now, although our retainage ratios are still very, very strong. We're certainly seeing some customers looking for higher rate opportunities. I've heard the same thing that the second quarter is gonna be, you know, the next Fed increase is gonna be for the customers. I've heard that as well. I guess based on our retainage right now, we're pretty comfortable with where we're at, and we'll take that as it comes.
Got it. I think in the press release, you mentioned something about aggressive marketing and product differentiation. I think you talked a little bit about some of the product differentiation with the Hometown Heroes program. You know, in terms of the aggressive marketing, is that something that is gonna be that we're gonna see more obvious in the expense line in coming quarters?
That's pretty much patted down, I think, at this point in time. I don't think you'll see a big spike in the advertising. We are taking advantage of different sources of advertising, free or less expensive. I can't say cheap quality issue. We're looking at less expensive alternatives with regard to marketing. We're trying to be more and more in social media and more and more on the internet and more and more direct contact with our customers. I don't think you're gonna see a big spike in the advertising or marketing line. Print advertising, you know, Alex, is outrageously expensive, and even some of the television media are also very expensive. We're trying to find alternate ways to do it.
Got it. Just a final question from me, just on the reserves.
Just on a side note, we're also big on surveying our customers to find out where they came from, and some of those results are pretty interesting too, so.
Yeah. The final question just for me on the reserve and sort of how to think about the provisioning. We've had four quarters now of negative provisioning. You know, a lot of economists are projecting a recession later this year, if we're not already in one. What are the factors that would cause that ACL to go higher? I mean, is it more based on unemployment or GDP, or is it more based on sort of the. I mean, obviously, your current credit metrics as well as loss histories play a factor in that too. But can you help us maybe just to get a better sense for sort of the weightings around the different components of calculating that ACL?
Yeah. Well, you hit, you know, the high points there, Alex. Unemployment is a big factor. You know, one of the things, too, is when we take a look at it, we also take a look at it in the markets that we serve, right? A big part of our CECL is the numbers in the Upstate New York markets and then also the Florida market. Taking a look at those kind of separate in the loan balances and the loan growth in those areas, and then layering in what you kind of just started to hit, GDP in that area, unemployment in that area, and then overall loan growth in that area.
You know, those are the major components, but it is bifurcated, I guess. It is kind of when we look at it, when we calculate our reserve. We follow it just as much as you, and you know, we'll see where unemployment, some of those numbers start to go over the next few quarters. Good turnaround.
Great. Thanks for taking my questions.
Thank you, Alex.
Thank you. Our next question comes from Ian Lapey of The Gabelli Fund. Ian, your line is now open.
Hi. Good morning, and congratulations on a strong quarter. I was just hoping, could you talk about the competitive environment for underwriting mortgages, sort of who your toughest competitors are, whether they're, you know, traditional branch-based lenders like you or Fintechs or others? Then maybe similarly talk about the competition for deposits in the same, sort of who the toughest competitors are. Maybe we could start with that.
From market share perspective, in this area, Ian, the credit unions are very strong. They're very strong competitors in the upstate area. Downstate, it shifts to some of the internet lenders, and even Wells has a very large presence, especially Westchester County. Florida is the same way. Obviously, you can't discount Truist, but Wells Fargo and some of the internet lenders are very formidable in the Orlando area, the Central Florida area. As far as deposits go, it's full scale. We compete against everyone. I know that sounds like crazy, but you know, anybody can come into the deposit market hot and heavy at any particular time, especially with regard to CD gathering.
We're focused, as I said in the presentation, more on the core, and our locations and our some of the side things do us very, very well in that area, attracting customers. You know, they're domestic ATMs. You don't have the foreign charges that go along with it. There are a lot of very positives. There are a lot of locations, a lot of personal contact. Hopefully we're doing a good job in the battle for core accounts. CDs and larger deposits, people can come in and out of the market at any time. I'm not telling you anything you don't know, but many of the internet banks right now are doing some crazy stuff with regard to deposit pricing. We're certainly hearing and seeing a little bit about that now.
Okay, thanks. If you look out sort of the next three years, what do you see as the biggest constraint on growth? Is it finding attractive mortgages to underwrite? Is it, you know, growing your deposit base, or both?
Well, all of the above, both of those items certainly, Ian. I would also add the labor market. Hiring and finding qualified people, getting to stay long enough to be trained and be productive members of our team, that's another big issue.
Okay. On the Trustco Financial-
From a positive perspective, Ian.
Oh, sure.
No, go ahead.
Sorry.
Go ahead. No.
No. Why don't you finish, and then I'll ask the next one.
Well, from a positive perspective, the balance sheet we built, and you see this, is built to withstand and prosper during off times. We feel we're in a pretty good position that if a recession or some difficulties do come about, we'll be standing strong and be able to withstand whatever might be coming.
Okay. Yeah, I agree. I was just gonna ask on Trustco Financial Services. It looked like, you know, considering the tough both stock and bond markets, there was a pretty good quarter. Can you just remind me sort of what, I think you said $909 million in AUM. What products are you offering there, and have you been gaining share generally in that area?
I would say it's a traditional trust department, Ian, very much. We're attempting to convert that and get more investment management accounts and some different accounts just from a diversity perspective. It is very much a traditional trust department. A lot of custody accounts, a lot of estate administration, those types of items.
Okay. Last one. What is your sort of branch growth strategy over the next three years?
Well, we're very much in an infill mode. Well, during the de novo period, I think we opened 18 branches in one year. That was our top year. We're certainly not going to that. I think you'll probably see us a net even over the next three years because there are several branches that we will probably close that have not performed up to our expectation. At lease renewal, we'll probably opt to close them. There are a couple of other markets like the Port St. Lucie area in Florida along the Treasure Coast and a couple of other areas in New York that we would like to infill with additional locations. It'll probably be a net, pretty much a net zero over the next three years between closures and new branches.
Okay, that's it. Thank you.
Thank you, Ian.
Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. McCormick for any closing remarks.
Thank you for your interest in our company, and have a great day. Try and stay cool here in the Northeast.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.