Evans Bancorp - Q1 2022

Transcript

Speaker 0

Greetings and welcome to Evans Bank of First Quarter Fiscal Year 2022 Financial Results Conference Call. Formal Presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Deborah Pawlowski, Investor Relations for Evan Bancorp. Please go ahead.

Speaker 1

Thank you, Peter, and good afternoon, everyone. We certainly appreciate you taking the time to join us today and in your interest in Evans Bancorp. On the call with me, I have David Nasca, our President and Chief Executive Officer and John Connerton, our Chief Financial Officer. David and John will review our results for the Q1 of 2022 and provide an update on the company's strategic progress and outlook, after which we will open it up for Q and A. You should have a copy of the financial results that were released today after markets close.

And if not, you can access them on our website atwww.evansbank.com. As you are aware, we may make some forward looking statements during the formal discussion as well as during the Q and A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find those documents on our website or atsec.gov.

With that, let me turn it over to David to begin. David?

Speaker 2

Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us for the call today. I will start with a review of the past quarter and then hand off to John to discuss the results in detail. The company continues to perform towards its focused strategy of driving commercial loan growth, Amplifying revenue streams such as residential mortgage and insurance, while emphasizing talent, customer experience And operational efficiency to further scale the organization.

During the Q1, the total loan portfolio excluding PPP grew $47,000,000 or 12% annualized. Over the last year, excluding PPP, Total loans were up $84,000,000 or 6 percent of which the commercial production was almost evenly split between C and I and CRE. Overall, our commercial business has been performing well as we leverage recently added talent across our footprint And our Rochester market efforts are gaining traction, in part because of reduced pandemic restrictions allowing our associates to get out in that market And meet clients and prospects. This resulted in record commercial loan closings of $109,000,000 during the Q1 And further, a solid pipeline to drive future results. This production will be more fully realized in our reported results As the muting effect of PPP is nearing its end with just $10,000,000 of balances left at quarter end.

Credit quality has been stable, especially with respect to our efforts and assistance related to the hotel portfolio. We are still actively monitoring and evaluating this portfolio in response to the economic impact of the pandemic. As a reminder, during 2020, we classified $81,000,000 of loans to clients within the hospitality industry as criticized. Since that time, approximately 1 third of the portfolio was upgraded or paid off, leaving $55,000,000 in criticized status at the end of The 2022 Q1. The upgrading for performance on the remaining criticized hotel credits is dependent on continued positive payment history.

While Evans has a primary focus of meeting the needs of business and commercial clients, the retail side of our business continues to grow and supplement our efforts With solid consumer and small business lending, cultivation and deposit gathering initiatives, Residential mortgages increased $42,000,000 since the Q1 of 2021 and we are acquiring new core checking balances at a stronger rate than accomplished last year. Evans prides itself on listening and responding to the needs of our clients and communities. The evolution of technology and shifting preferences over the past several years towards online, mobile And ATM channels has led to a change in how clients interact with us. And while we grew in new accounts and customer base, In person transactions declined. These trends have been amplified over the past 2 years with the COVID pandemic and show no signs of rebounding to Due to these continuing trends, Evans performed an in-depth analysis of how to best meet clients' desired way of doing business.

Throughout this review, keeping the customer experience at the forefront has been priority 1. To that extent, We have made significant investments in our digital capabilities, including online account opening and an upgraded online banking platform. We've also continued to make improvements to our branch network, which included the opening of a new branch at Westminster Commons on Buffalo's Eastside as well as a number of remodels and updates to existing facilities. Ultimately, as a result of this analysis And shifting customer preferences, we have embarked on a branch network efficiency initiative that will result in changes to 3 of our 21 locations. At the end of March, we converted our Downtown Buffalo branch, which was conceived as a business relationship center back to a loan production office for both commercial and consumer lending as well as other by appointment business needs.

Over the upcoming summer, we will also be closing 2 branch locations, 1 in the Rochester market that has sufficient overlap with other existing locations and consolidating 1 of our Southern Erie County branches where usage patterns have changed into a location that is literally down the road. Once fully executed and branches are sold, subleased or leases non renewed, the expected run rate of annual cost savings is expected to be approximately $750,000 It is important to note that this is being accomplished with no We are also proud to announce this quarter a 3.39 percent annual increase in our cash dividend to shareholders to $0.62 per share, representing a trailing 12 month yield of about 2.95%. Lastly, a critical strategic area of focus for any business and what we believe is a differentiator for Evans is talent. We, like all businesses, have been challenged by the environment, associate desires and competition for top performers. We have had success in recruitment and retention of these key performers overall.

We believe this success is a reflection of our culture, Commitment to our associates and their development and indicative of our organization's reputation as being a community of talented, collaborative, caring people supported in their career and client goals. With that, I'll turn it over to John to run through our results and then we'll be happy to field any questions. John?

Speaker 3

Thank you, David, and good afternoon, everyone. Net income was $4,700,000 or $0.86 per diluted share in the Q1 of 2022 compared with $4,900,000 or $0.89 per diluted share in last year's Q1. Net income was $5,900,000 or $1.06 per diluted share in the trailing Q4 of 2021. The change from the sequential Q4 was largely due to lower net interest income impacted by reduced PPP fees earned during the Q1 of 2022. In addition, the Q4 of 2021 included higher interest income recognized on non accrual loan payoffs and higher amortization of fair value marks on loans obtained in the FSB acquisition.

Net interest income decreased $3,200,000 or 16% from the sequential Q4, but was little changed from the Q1 of 2021. The decrease in PPP fees reflects the deceleration in the rate of remaining loan forgiveness as the program approaches its conclusion. As PPP loans are forgiven, the company is accelerating the recognition of fees that were being amortized over the original life of the loan. During the quarter, we realized $500,000 in deferred PPP fees compared with $2,400,000 in the Q4 of 2021 and $1,700,000 in the Q1 of 2021. Nearly all the original $7,400,000 in Fees from the 1st round of PPP have been booked to income.

The 2nd round of PPP originations produced $4,900,000 of additional fees, of which $4,600,000 has been recognized in income, leaving approximately $300,000 of fees yet to be booked. The $200,000 provision for loan losses in the current quarter was due to the growth of performing loans offset by reduction in specific reserves. 1st quarter net interest margin of 3.18 percent decreased 56 basis points from the 4th quarter, which was elevated as a result of higher PPP Fee amortization, non accrued interest recognized and acceleration of loan mark impact. Excluding those items, net interest margin for the sequential 4th Quarter was 3.06%.

Speaker 4

I will talk

Speaker 3

to our NIM expectations at the end of my remarks. Non interest income was $4,400,000 in the quarter. Insurance, which is the main driver within this category, was up from the linked quarter due to higher profit sharing revenue. On a year over year basis, insurance revenue was down $200,000 primarily due to discontinued operations from our insurance claims service business and decreased profit sharing revenue. We have spoken about the importance of this insurance line business line and how it supports our strategic plan.

The commercial insurance department was recently reorganized for improved efficiency and increased bench strength and that team experienced its best first quarter premium retention since 2018. As we move forward, we will continue to work on our development program for sales professionals new to commercial insurance and implement enhanced tools and technologies Total non interest expense decreased $1,800,000 or 11% from the sequential 4th quarter and on a year over year basis was Up less than 1% as we have balanced our investments around strategic focus areas and are utilizing technology to supplement our efficiency efforts. Salaries and employee benefits decreased $800,000 or 8% from the 4th quarter, largely due to the accrual for incentives related to our record performance 2021. The increase in salaries and employee benefits from the prior year period was primarily due to increased deferment of PPP loan origination costs during the Q1 of 2021 as well as merit increases in labor inflation. The other expense line was down from the linked quarter approximately $700,000 with more than half of that reflecting philanthropic contributions made during the Q4 of 2021.

The effective tax rate for the quarter was 24% compared with 23.4% in the Q4 of 2021 25.2% in last year's Q1. Turning to the balance sheet. We continue to deploy excess liquidity in the investment securities And those balances are up $194,000,000 since last year's Q1. We're also using liquidity to fund loan growth As loans increased $32,000,000 during the Q1 or $47,000,000 excluding the impact of PPP loan forgiveness. The balance of PPP loans forgiven in the Q1 of 2022 was $15,000,000 bringing the total of the loans forgiven to date to 288,000,000 The remaining balance of all PPP loans as of March 31 was $10,000,000 or about 3% of the approximately $300,000,000 originated.

The bank's net origination of new commercial loans, which excludes refinancing of existing loans was $94,000,000 during 2022 Q1. This compares with an average net origination of $68,000,000 for the quarterly periods during 2021. We still have a healthy commercial loan pipeline of $100,000,000 and expect solid commercial loan growth this year as payoffs and refinances continue to normalize. Asset quality remains strong despite a modest increase in non performing loans, which reflected just one commercial real estate relationship that continues to accrue and is well collateralized. Total deposits of $1,990,000,000 grew 3% sequentially and were up 6% since last year's period.

The change from the linked quarter was primarily due to the seasonal increase in municipal deposits, while the year over year change reflected an accumulation of liquidity by commercial and consumer customers response to the pandemic. Our balance sheet is well positioned for rising interest rates and given the recent and expected Fed actions, we do facing a notable lift to net interest income as we progress through the year. Assuming the current yield curve, we expect NIM to expand over the next 12 months by 15 to 20 basis points. This does not include any additional Fed moves beyond their March rate increase. Any further increases by the Fed would have a positive impact.

As a reminder, the impact of 25 basis points move from the Fed, all other things held constant, increases net interest income by $1,000,000 annually due to our variable rate portfolio. With that operator, we would now like to open the line for questions.

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. Our first question is from the line of Alex Twerdahl with Piper Sandler. Please go ahead, sir.

Speaker 5

Hey, good afternoon.

Speaker 2

Good afternoon, Alex. First off,

Speaker 0

just wanted to follow-up on

Speaker 5

the last comments you made, John, on the margin, 15 to 20 basis points, is that Off of that 306% core margin that you alluded to?

Speaker 3

So 306% was in the 4th quarter. That Same relative excluding the two pieces there would be 310 for this Q1. So it would be off of the 310.

Speaker 5

Okay, great. And then the 25 basis points equals $1,000,000 per year of NII. Is That just assumes the short end of the curve goes up, right, just for Fed hike. And if we get I think the forward curve last I look was looking something like 8 hikes this year. Is the 8 hike also equal to $1,000,000 or is it just kind of the first couple?

Speaker 3

Well, it's a little nuanced in that the 25 basis point move of $1,000,000 is just Straight up what we would earn on our variable rate reprice. Obviously, the amount of Reprice that we have on the longer end with new originations and then any deposit movements are included in my 15 to 20 basis points.

Speaker 5

Okay. So if we

Speaker 3

if But Alex, sorry, and that only The 15 to 20 only includes a movement of that first 25.

Speaker 5

Okay. So as we look at today, the Fed does nothing else for the rest of the year, we're getting $15,000,000 to $20,000,000 Assuming the Fed sticks to what The forward curve says we're going to get $1,000,000 per of annual income per rate hike less Whatever you want to paying for higher on deposits.

Speaker 3

Yes. And so just as a point of reference, last cycle, We had about a 30% beta on our deposits. We would expect probably less And at this time just with the amount of liquidity from on our own balance sheet as well as other banks. So And that probably that beta probably wouldn't start to happen till we see or our expectation is till we see at least probably on the short end 100 basis points. After that, then the 30%.

So we would benefit 70% of any movement after that.

Speaker 5

Okay. Thanks for the color on that. And then,

Speaker 0

can you maybe talk a

Speaker 5

little bit about some of the new loan yields that you're putting on today relative to the To the book yield and sort of how that could actually impact NII also?

Speaker 3

Sure. I mean, our current Portfolio rates that are coming on are well over 5%, closer to 6% on the commercial side And on the residential side. So that is going to positively impact That is included in the 15% to 20% excluding again no other short term movements. A big chunk of that movement is the origination offering rates that we're getting on the new volume that we're going to have for the remainder of the year.

Speaker 5

Okay. And then for the remaining part of the hotel portfolio that you need to see payment histories, what's the timeframe that you You kind of see the payment histories are over and sort of when would it be fair to anticipate those maybe impacting or seeing those Additional reserves released?

Speaker 3

So, I mean, up here in Western New York, a lot of our we're Cyclical and summer is a big piece. We'd like to not see another season. We think this will be the 1st normal season. So it will be it will probably be the end of 3rd or 4th quarter before we can really make determinations on those that book.

Speaker 5

Okay. And then just on expenses, A couple of moving parts.

Speaker 0

I know you talked about

Speaker 5

the other expenses dropping, half of which was due to charitable contributions in the 4th quarter. And then you talked about the salaries coming down as a result of less incentive

Speaker 6

comp. As we

Speaker 5

look at, I guess, primarily those two lines, Should we be I mean, are those kind of good starting points for the year? Or is there you run with higher vacancies like every other bank out there and looking Excess positions. I guess how should we be thinking about the overall level of expenses?

Speaker 3

Yes. Those are pretty low at

Speaker 5

the start of the year.

Speaker 3

Sorry, Alex. Yes, they're good start points on both of those line items. I think the other line item is it will not move much from where it is in the Q1. The salaries, I would expect that with merit increases in there, and some vacancy fills that we should Comparing 1st quarter on to the remainder of the quarters will be more like 4% to 5% higher.

Speaker 5

Okay. Thanks for taking my questions.

Speaker 3

Thanks, Alex.

Speaker 0

Thank Our next question is from Chris O'Connell with KBW. Please go ahead, sir.

Speaker 6

Thanks. Good afternoon.

Speaker 0

We're hoping to just

Speaker 6

Get some details on the core NIM this quarter. What was there if there was any Non accrual recapture or accretion income?

Speaker 3

So we're at 3.18 and really Going down to that $310,000,000 that I mentioned earlier would be our core NIM excluding the credit mark amortization and PPP. We didn't have any significant non accrual.

Speaker 2

So Chris, the net was $306,000,000 for the 4th quarter. We're saying that the core is 310 for this quarter.

Speaker 6

Okay, got it. And then as far as the balance sheet liquidity deployment goes, Is your target there's substantial movement this quarter out of cash into securities. Is your target still at $40,000,000 to $50,000,000 level For cash and do you think you'll get there this next quarter or is it going to come through over the course of the year?

Speaker 3

It will be over the course of the year, Chris.

Speaker 6

Okay, got it. And is that Liquidity deployment, the majority of the 15 to 20 basis points kind of of the core NIM expansion With no further rate hikes built in?

Speaker 3

Yes. Yes, That includes our growth.

Speaker 2

Yes, there's I was going to say there's 2 pieces to that. The loan growth is significant in that And the other piece is the securities. So it's not just the securities, if that's what you're asking.

Speaker 6

Okay, perfect. And then do you guys have the amount of the loan portfolio that's Variable or floating?

Speaker 3

We have yes, hold on a second. It's percentage wise, it's 25%.

Speaker 6

Okay, great. And then just circling back to the OpEx Discussion, was the 4% to 5% inclusive of the cost saves coming out Related to the branch efficiency initiatives in the middle of the year?

Speaker 3

It was 4% to 5% on the salary line item, Chris. And that will include the cost saves from the branches. Some of the costs that most of the salary saves Since we've redeployed those individuals and got both positions, have kind of have been recognized and that's about half. But the facilities saves are going to be over a period of time as we repurpose those facilities or exit them, Which officially we won't close those branches until the Q2 or the Q3 sorry. Q3.

Speaker 6

Okay, got it. And in terms of capital levels, I know that the regulatory ratios At least Tier 1 held steady during the quarter. How do you guys think about the TCJA ratio? Is there like an absolute level that were it were to drop down to that would start to concern you guys even if the regulatory ratios Hold in pretty steady here?

Speaker 3

Yes. I kind of reiterate what you're saying. We're usually our most restrictive Ratios and we pay most of our attention to the regulatory from a growth perspective. We do like to be at least from a tangible book like to be or just from a common equity to assets around 8%. The reduction from AOCI has put us down under that.

But just based on our expectations Of our net income growth and our asset growth, we should be back to that within the year.

Speaker 6

Okay, got it. That's helpful. And then Can you remind us like as the hotel book, if it progresses so that all of it's Coming off the criticize toward the end of the year here, how much does that impact your allowance?

Speaker 3

So there's $55,000,000 in criticized and we've shared this in past quarters. We hold about an additional 3% As a criticized asset versus typical.

Speaker 6

Okay, got it. And any color or additional color outside of what was in the release On the NPL increase this quarter?

Speaker 3

Yes. So it was just a loan that's A performing loan that got delayed in closing and that was really the only difference in lift there. And actually our Appreciate it. That'll close in early Q2.

Speaker 6

Okay, great. That's all I had. Thanks for taking my questions.

Speaker 3

Thanks, Chris.

Speaker 0

Thank you. As there are no further questions, I would now like to turn The call back to the management for closing comments.

Speaker 2

Thank you, Peter, and thank you all for participating in the teleconference Today, we certainly appreciate your continued interest and support.

Speaker 1

Excuse me, I'm sorry. I just noticed that Richard Lache in the field capital

Speaker 2

Okay.

Speaker 1

So Peter, can you

Speaker 0

put Yes, certainly. Mr. Richard Lassie, you can proceed with your question as the line has been unmuted.

Speaker 4

Yes. Thank you. Thanks for doing the call. You mentioned the deposit betas, which is the repricing being better this time. What do you think about the flow of deposits, the absolute dollars?

Do you think you can hold on to what you have or actually grow it?

Speaker 3

Yes. Our expectation is that we grow with the activity that we're going to have on the commercial and the consumer side. It will probably be in the single digits. Excluding our probably our more sensitive portfolio, which Around our municipal portfolio. So there's some more probably higher sensitivity on that book, which is currently around $100,000,000 but a lot most of those are core customers and we expect that there may be some runoff there, But not a significant probably 20% of that at most.

But other than that, we feel that we're going to continue to grow deposits.

Speaker 2

Yes, Richard, a lot of our growth to this point has been core checking and commercial checking. That's a pretty heavy percentage of what we're holding on to now. Early on in the pandemic and whatever, as liquidity built The price sensitive deposits did their thing and we did have some runoff there. But we're continuing to generate deposits currently In the commercial checking and the consumer checking space. So that's related to the business that we're doing with those commercial clients.

Speaker 3

In our projections, it was asked about our liquidity levels. We do have in that projection where liquidity level is some Especially around the municipal dollars and some movement on those.

Speaker 2

Tapering, yes.

Speaker 4

So given those flows, where do you think your total cash and securities percentage ends up a year from now or It's about 25% now.

Speaker 3

I mean, Not as a percentage, but I'd say from here forward, we will probably be about $60,000,000 less on those two Those added those 2 category excuse me, category.

Speaker 4

Good. And as you go out and price loans, fixed rate loans, are you able to fully Maintain the same spreads that you were getting before. In other words, even if you do a 5 year fixed rate loan, you might price it at closing off The current 5 year treasury plus a spread. Are you able to maintain that spread today now that The treasury rates have moved up or you're getting pushback from customers?

Speaker 2

I think we're getting some pushback. The spreads have come in a little bit From where they were, we might have been at $235,000,000 previously to $240,000,000 but we're probably in the $225,000,000 to $230,000,000 ranges now. We price off the Federal Home Loan Bank curve as well as opposed to treasuries, but we are seeing the spreads get Pressured a bit.

Speaker 4

Yes, which makes sense. Anything on the FinTech side or the digital side that's worth noting?

Speaker 2

Not worth noting. I will just say we have been migrating to Online platforms over the last couple of years, we're doing that in partnership with different providers that we have. Nothing in partnership currently with FinTech, true FinTech Providers where we're doing a slice of business that is special To those FinTech providers, however, we have talked to some. We are looking at investments Investment funds in that space to keep us aware of the opportunities there, but we haven't we don't have a ton of Progress in terms of making FinTech straight FinTech forward investments at this moment.

Speaker 4

Okay. Did you participate in any of those partnerships, those funds that were set up by various players that recruited a lot of banks?

Speaker 2

We're working on that currently.

Speaker 4

Okay. And then I guess 2 years into the acquisition of Fairport, Can you give us an update on what how you think that went?

Speaker 2

I'll give it to you a little bit Qualitatively, I think the transition has gone well. We announced that we are Closing one of those offices because really it's not aimed at what we're doing. It was very highly consumer related and there was A lot of transactions and there wasn't a lot of brand recognition because it was opened under the old regime and they didn't really have that. We are starting to get pretty significant traction in the Rochester market in terms of the commercial side even though we've been there for years. We expect Probably 35% of our commercial production to come out of there in the next year or so.

So we think that the traction is beginning now that the COVID restrictions have lifted and we're able to get out in that market. So we're pretty optimistic about what we're seeing from our Penetration beginnings there after the COVID sort of hiatus, if you will.

Speaker 4

Okay. All right. Thank you very much.

Speaker 2

You're welcome. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to the management for closing remarks.

Speaker 2

All right. Again, I'll say thank you for joining us today. Please feel free to reach out to us anytime. We look forward to talking with all of you again when we report the Q2 2022 results. And we hope you all have a great day And please let us know if we can answer any questions going forward.

Have a great day.

Speaker 0

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.