Evans Bancorp, Inc.
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Greetings and welcome to the Evans Bancorp’s Second Quarter Fiscal Year 2021 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, Investor Relations for Evans Bancorp. Thank you. Please go ahead.

[Deborah Pawlowski:]

Thank you, Donna and good afternoon everyone. We certainly appreciate you taking the time today to join us and your interest in Evans Bancorp. Here with me, we 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 second quarter of 2021 and then we will open the call for questions. You should have a copy of the financial results that were released today after markets closed. And if not, you can access them on our website at www.evansbank.com.

[David Nasca:]

Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us for the call today. As we get started, I would like to once again take this opportunity to thank the entire Evans team for its diligent efforts and continued outstanding commitment to both drive our business and support the communities we serve. Overall, we delivered record earnings for the quarter, with net income of $6.3 million compared with $500,000 in last year’s second quarter, up 30% from $4.9 million in the first quarter of this year. These results reflected a strong emergence from the pandemic as the economy recovers and were driven by flexibility, responsiveness and engagement with clients and prospective clients throughout this period. Our customer base grew and we expanded our market presence into Rochester. While still addressing our hospitality portfolio, our disciplined approach to credit played out in our results as we recorded a notable provision release due to improved credit and economic conditions. Loan originations were at record levels once again though from a cumulative standpoint, total loan balance growth was muted given the heightened level of refinancing and payoffs in the historically low rate environment and excess liquidity that remains in the market combined with ongoing Paycheck Protection Program loan forgiveness. We feel we captured the pent-up demand in both commercial and consumer lending and regained the momentum that had been building pre-COVID, which helped drive higher net interest income. Importantly, our loan pipeline remains solid, which engenders confidence that we can generate growth excluding PPP forgiveness over coming quarters. As we noted on our last call, we spent tremendous time engaged with our associates regarding the return to our offices while continuing to demonstrate flexibility and seeking to address concerns surrounding workplace safety. Approximately 20% to 30% of our associates were working onsite on an average day and on July 6 we began bringing more staff back to our new administrative office. The majority of Evans’ associates based at our administrative headquarters are eligible for a hybrid work schedule with many splitting their work time between home and office. We have asked these associates to work on-site at least 3 days a week, but they are welcome to work exclusively in the office if they desire relative to their positions and responsibilities.

[John Connerton:]

Thank you, David and good afternoon everyone. As David noted, we achieved record net income of $6.3 million or $1.15 per diluted share compared with $0.5 million or $0.09 per diluted share in last year’s period. The increase was due to higher net interest income and a decrease in provision for loan losses reflecting improved economic trends and conditions related to the COVID-19 pandemic. Also, in last year’s second quarter, the bank incurred $2.8 million of higher non-interest expenses largely due to FSB merger-related expenses. The 30% growth in net income for the first quarter reflected higher net interest income and a $1.1 million lower provision for loan loss. Net interest income increased $1.8 million or 11% from the first quarter and $3.4 million or 23% from the prior year second quarter. The change over both periods reflected higher fees earned in connection with PPP loans and commercial prepayments. The increase from the prior year period was also driven by higher interest-earning assets. 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 $2.5 million in deferred PPP fees compared with $1.7 million in the first quarter of 2021. Of the original $7.4 million in fees from the first round of PPP, there is $700,000 remaining to be booked to income. The second round of PPP originations produced $4.9 million of additional fees that will be realized over their 5 year terms or when forgiven. The $800,000 release of allowance for loan losses represents a decrease of $700,000 in specific reserves associated with a single commercial customer relationship and improvement in economic conditions, including stabilized employment and improving GDP numbers. This was partially offset by loan growth during the quarter.

[Operator:]

Thank you. The floor is now open for questions. Our first question is coming from Alex Twerdahl of Piper Sandler. Please go ahead.

[Alex Twerdahl:]

Hey, good afternoon guys.

[David Nasca:]

Good afternoon, Alex.

[John Connerton:]

Hi, Alex.

[Alex Twerdahl:]

In terms of the PPP, you had $145.7 million left at the end of the second quarter do you have the number that was left, the balance at the end of the first quarter handy, John?

[David Nasca:]

We paid off $97 million.

[John Connerton:]

Yes. We paid off $97 million, Alex, just to back in it that way.

[Alex Twerdahl:]

Okay.

[John Connerton:]

Go ahead.

[Alex Twerdahl:]

Yes. No, no, sorry, you were going to say something.

[John Connerton:]

No, that’s good.

[Alex Twerdahl:]

Okay. And then in terms of the fees that remain I think you said there was $700,000 left from the first round. If I remember correctly, there was something like $4.1 million left in the second round at the end of the first quarter, so that – I mean, are there around $4.5 million of fees total between the two rounds that are left that haven’t yet been recognized through NII?

[John Connerton:]

That’s correct.

[Alex Twerdahl:]

Okay, perfect. And then the commercial prepayment income that you cited in the press release and you mentioned a second ago that’s in the NIM, can you break that out in terms of the dollar impact in the second quarter?

[John Connerton:]

Say that again, Alex. The prepayments, did you say?

[Alex Twerdahl:]

Yes, I think commercial prepayment income.

[John Connerton:]

Yes, it’s about $0.5 million. Now, we do have normal prepayments just in every normal environment. This is a little – and they come in clunky. So, over the year, we have a typical amount $500,000 is high for a particular quarter, but it’s about 10 basis points on the NIM, but again, not all of that is unique, because it does occur through every quarter typically.

[Alex Twerdahl:]

Got it. And then when you talk about the stability in the NIM, which is also sort of excluding the prepayments and excluding the PPP, what are your assumptions for levels of excess liquidity and cash?

[John Connerton:]

So, we will – especially with the forgiveness coming back at us, we still have good growth from the perspective of our pipeline, as David mentioned, but we will probably have excess liquidity through the middle of 2022. And so we are – from where we are now, we would expect that we would start to hopefully be borrowed through the middle or hopefully, the third quarter of 2022.

[Alex Twerdahl:]

Okay. And I guess what I am getting at is translating a stable NIM to NII excluding prepayment penalties, excluding PPP, do you expect the NII to be roughly stable as well for the next several quarters?

[John Connerton:]

We would expect with the growth that we have is that NII would grow.

[Alex Twerdahl:]

Okay. And then just last for me, when I think about expenses and you talked about some of the reopening that’s happening and getting your guys – your people back in the office, is that going to cause expenses to go up a little bit in the third quarter?

[John Connerton:]

Where some expenses are coming back, some expenses, we will be relieved of some expenses actually. So, we don’t expect overall for it to be impactful to the quarter – for third quarter.

[Alex Twerdahl:]

Got it. Great. Thanks for taking my questions.

[John Connerton:]

Alright. Thanks, Alex.

[Operator:]

Thank you. Our next question is coming from Bryce Rowe of Hovde Group. Please go ahead.

[Bryce Rowe:]

Thanks. Good afternoon. Good evening.

[David Nasca:]

Good afternoon.

[John Connerton:]

Hi, Bryce.

[Bryce Rowe:]

Dave, maybe you could speak to the lending environment, you talked about refinance and prepayment activity, so if you could just kind of frame that against the pipeline and how you are seeing prospects for loan growth end of – second half of this year and into next and then again just frame it against that the competitive environment that we are in.

[David Nasca:]

Okay, I will try to do that. So, let me say it this way. We had very strong growth for the first two quarters. As John mentioned, as I mentioned, the closings at that point were about – if I parsed it out it’s about 80% commercial real estate, about 20% C&I. Some of that is a result of – there was a tremendous amount of liquidity in the market. So, businesses weren’t expanding their line, because they were sitting on a lot of cash, for example. We are seeing our pipeline is flipped. We are seeing more opportunities in C&I, where the pipeline is a little more evenly balanced now between C&I and CRE, so that’s the pipeline. Competitively, we feel good about the growth we have experienced because everything I read seems to be saying that growth in the banking industry is a little bit muted right now in terms of production and we are seeing some. So, we feel positively about that. Looking into the future, we are seeing ourselves being able to get traction right now coming out of COVID both from a pent-up demand kind of situation and also we had pretty good momentum going into the pandemic and we believe we are recapturing that momentum coming out. So, is it going to be a little lumpy, as John mentioned, yes, we think so. However, we think that the arrow is pointed north in terms of our ability to capture some growth going into the future quarters and we said that in my speaking comment. So, does that answer your question, Bryce, in terms of what we are thinking about?

[Bryce Rowe:]

I think so and I mean, I’m just curious if you anticipate – I mean, obviously you are going to have refinance and prepayment activity every quarter like John said it sounded like it was somewhat elevated here in the second quarter, do you have any visibility into continued prepayment activity kind of being elevated or do you kind of expect it to normalize as we move forward?

[David Nasca:]

I will let John give you a little more color on this, but I am going to take the high road here and just say some of the prepayment activity is elevated, because we are in a historically low rate environment and there is a lot of liquidity slushing around the system. As soon as that starts to normalize a little bit more, we think that prepayments slow a bit. That said we are not sure when that is. Your crystal ball is probably better than mine in terms of that. Inflation, if it were to rear its head, we believe we will slow some of that as well, but there is a big overhang on the liquidity piece here. So John, do you want to add anything?

[John Connerton:]

The only thing I would add, Bryce, is that we are seeing a deceleration of refis. So, we are seeing it just in our own portfolio, so it is slowing. So, that’s something that gives us some indication that our growth with the originations that we had again, we had a record pipeline in the first quarter that we – that kind of drove good commercial loan growth excluding PPP. In the second quarter, we still have what we would say is a healthy pipeline, not a record pipeline like we had in the first quarter. But – so with that good with that healthy pipeline and some slowing refis, we think growth is going to be at least easier than it has been over the last three or four quarters.

[David Nasca:]

And if you are also talking about consumer loans, we are seeing a slowdown in the refinance activity, not monstrously, but we are starting to see a little back off on what was a heavy refinance boom that everybody experienced and we are seeing more normal activity in the marketplace.

[Bryce Rowe:]

Got it, okay. Maybe one more for me, shifting gears to the allowance. Allowance percentage came down little bit here in the second quarter and just want to try to juxtapose that against your comments about the hotel portfolio showing some improvement, the U.S., Canada border opening up here later in the summer or early fall. So, maybe you could help us understand perhaps what – if there is any specific reserve or q-factor within the allowance methodology that could diminish here in the near future and could bring that allowance down even more?

[John Connerton:]

So, the biggest piece of what’s – that we reserved for in 2020 that – reserved for the uncertainty and risk in our portfolio that’s left right. We have the uncertainty and risk around the economy. We have kind of worked a little bit back – quite a bit back on that. What’s left is really the risk that we had in the hotel portfolio and that is – that still remains and we haven’t moved that. But as we get performance in that portfolio and we will start to see that as the summer results come through, that would be the amount of reserve that we have that could start to move the provision one way or the other.

[Bryce Rowe:]

Okay. And John would you – I mean, would you mind quantifying kind of what that is as part of the $20 million reserve right now?

[John Connerton:]

It’s an $80 million portfolio and we had – we reserved probably an additional 4% on that portfolio.

[Bryce Rowe:]

Great. Alright. I think that’s it for me. Appreciate your time.

[John Connerton:]

Thanks, Bryce.

[Operator:]

We are showing no additional questions in queue at this time. I would like to turn the floor back over to the management team for any closing remarks.

[David Nasca:]

Thanks, Donna. I would like to thank everyone for participating in our teleconference today. We certainly appreciate your continued interest and support. Please feel free to reach out to us at any time. We look forward to talking with all of you again when we report our third quarter 2021 results and we hope you have a great day. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your participation. You may disconnect your phone lines or logoff the webcast at this time and have a wonderful day.