Evans Bancorp, Inc.
Q1 2022 Earnings Call Transcript

Published: 27 Apr 2022

[Operator:]

Greetings, and welcome to Evans Bancorp First Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the 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 Evans Bancorp. Please go ahead.

[Deborah Pawlowski:]

Thank you, Peter, and good afternoon, everyone. We certainly appreciate you are taking the time today 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 first quarter of 2022 and provide an update on the Company’s strategic progress and outlook, after which we will open it up for Q&A. 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. As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&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 at sec.gov. With that, let me turn it over to David to begin. David?

[David Nasca:]

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 focus 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 first quarter, the total loan portfolio excluding PPP grew $47 million or 12% annualized. Over the last year, excluding PPP total loans were up $84 million or 6% of which the commercial production was almost evenly split between C&I and CRE. Overall, our commercial business has been performing well as we leveraged 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 million during the first quarter 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 million 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 effect – evaluating this portfolio in response to the economic impact of the pandemic. As a reminder, during 2020, we classified $81 million of loans to clients within the hospitality industry is criticized. Since that time, approximately one-third of the portfolio was upgraded or paid off leaving $55 million in criticized status at the end of the 2022 first quarter. 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 million since the first quarter 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 two years with the COVID pandemic and show no signs of rebounding to pre-pandemic levels. 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 one. 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 East Side, 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 three 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 buy appointment business needs. Over the upcoming summer, we will also be closing two branch locations. One in the Rochester market that has sufficient overlap with other existing locations and consolidating one 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 it is – this is being accomplished with no employees losing their job and no expectation of any material loss of business. To date, the transition has been smooth with positive feedback. We are also proud to announce this quarter of 3.39% annual increase in our cash dividend to shareholders to $0.62 per share, representing a trailing 12-month yield of about 2.95%. Lastly, our critical strategic area 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?

[John Connerton:]

Thank you, David, and good afternoon, everyone. Net income was $4.7 million or $0.86 per diluted share in the first quarter of 2022 compared with $4.9 million or $0.89 per diluted share in last year’s first quarter. Net income was $5.9 million or $1.06 per diluted share in the trailing fourth quarter of 2021. The change from the sequential fourth quarter was largely due to lower net interest income impacted by reduced PPP fees earned during the first quarter of 2022. In addition, the fourth quarter 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 $3.2 million or 16% from the sequential fourth quarter, but was little changed from the first quarter of 2021. The decrease in PPP fees reflects the deceleration in the rate of remaining loan forgiveness as a 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 $2.4 million in the quarter of 2021 and $1.7 million in the first quarter of 2020 – 2021. Nearly all the original $7.4 million in the fees from the first round of PPP have been booked to income. The second round of PPP originations produced $4.9 million of additional fees of which $4.6 million 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. First quarter net interest margin of 3.18% decreased 56 basis points from the fourth 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 fourth quarter was 3.06%. I will talk to our NIM expectations at the end of my remarks. Non-interest income was $4.4 million 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 developments program for sales professional, new to commercial insurance, implement enhanced tools and technologies to succeed. Total non-interest expense decreased $1.8 million or 11% from the sequential fourth 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 fourth quarter, largely due to the accrual for incentives related to our record performance in 2021. The increase in salaries and employee benefits from the prior year period was primarily due to increased deferment of PPP loan origination cost during the first quarter 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 fourth quarter of 2021. The effective tax rate for the quarter was 24% compared with 23.4% in the fourth quarter of 2021 and 25.2% in last year’s first quarter. Turning to the balance sheet, we continue to deploy excess liquidity in the investment securities and those balances are up $194 million since last year’s first quarter. We’re also using liquidity to fund loan growth, as loans increased $32 million during the first quarter or $47 million excluding the impact of PPP loan forgiveness. The balance of PPP loans forgiven in the first quarter of 2022 was $15 million bringing the total of the loans forgiven to-date to $288 million. The remaining balance of all PPP loans as of March 31 was $10 million or about 3% of the approximately $300 million originated. The bank’s net origination of new commercial loans, which excludes refinancing of existing loans was $94 million during 2022 first quarter. This compares with an average net origination of $68 million for the quarterly periods during 2021. We still have a healthy commercial loan pipeline of $100 million 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 $1.99 billion grew 3% sequentially and were up 6% less 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 in accumulation of liquidity by commercial and consumer customers in response to the pandemic. Our balance sheet is well positioned for rising interest rates and given recent and expected fed actions, we do anticipate seeing 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 moved from the fed, all other things held constant, increases net interest income by $1 million annually due to our variable rate portfolio. With that operator, we would now like to open the line for questions.

[Operator:]

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

[Alex Twerdahl:]

Hey, good afternoon.

[David Nasca:]

Good afternoon, Alex.

[Alex Twerdahl:]

First off, just wanted to follow up on that last comment you made, John on the margin 15 to 20 basis points. Is that off of that 3.06% core margin that you alluded to?

[John Connerton:]

So 3.06% was in the fourth quarter that same relative excluding the two pieces, there would be three 3.10% for this first quarter. So it’d be off of the 3.10%.

[Alex Twerdahl:]

Okay, great. And then the 25 basis points equals $1 million per year of NII. Is that – it just assumes the short end of the curve goes up, right, just for fed hike. And if we get – I think the four curve less, I look was looking for something like eight hikes this year. Is the eight hike also equal to $1 million or is it just kind of the first couple?

[John Connerton:]

Well, it’s a little nuanced in that the 25 basis point move of $1 million 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.

[Alex Twerdahl:]

Okay. So if we…

[John Connerton:]

But, Alex, sorry, just – and that only includes the 15 to 20, only includes a movement of that first 25.

[Alex Twerdahl:]

Okay. So as we look at today, the fed does nothing else in the rest of the year, we again 15 to 20. Assuming the fed sticks to what the forward curve says, we’re going to get $1 million per of annual income per rate hike, less whatever you wind up paying for higher on deposits.

[John Connerton:]

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 than that this time, just with the amount of liquidity from on our own balance sheet, as well as other banks. So in that – probably that beta probably wouldn’t start to happen until we see our expectation is until 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.

[Alex Twerdahl:]

Okay. Thanks for the color on that. And then can you maybe talk a little bit about some of the new loan yields that you’re putting on today relative to the book yield and sort of how that could actually NII also?

[John Connerton:]

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 that is included in the 15% to 20% excluding, again, no other short term movement, 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.

[Alex Twerdahl:]

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

[John Connerton:]

So I mean, up here in Western New York, a lot of our were cyclical and summer is a big piece we’d like to not see another season. We think this will be the first normal season. So it’ll be – it’ll probably be the end of third or fourth quarter before we can really make determinations on those that book.

[Alex Twerdahl:]

Okay. And then just on expenses, a couple of moving parts. I know you talked about the other expenses dropping half of which was due to charitable contributions in the fourth quarter. And then you talked about the salaries coming down as a result of less incentive comp as we 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’re running with higher vacancies, like every other bank out there and looking to fill positions. I guess, how should we be thinking about the overall level of expenses from the pretty low at the start of the year?

[John Connerton:]

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 first quarter. The salaries, I would expect that with merit increases in there and some vacancy fills that we should comparing first quarter onto the remainder of the quarters will be more like 4% to 5% higher.

[Alex Twerdahl:]

Okay. Thanks for taking my questions.

[John Connerton:]

Thanks Alex.

[Operator:]

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

[Chris O’Connell:]

Thanks. Good afternoon. I was hoping to just get some details on the core NIM this quarter. What was there if there was any non-accrual, recapture or accretion income?

[John Connerton:]

So we’re at 3.18% and really the going down to that 3.10% that I mentioned earlier would be our core NIM, excluding the credit mark amortization and PPP. We didn’t have any significant non-accrual.

[David Nasca:]

So Chris, the net was 3.06% for the fourth quarter, we’re saying that the core is 3.10% for this quarter.

[Chris O’Connell:]

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 and to securities is your target still at $40 million to $50 million 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?

[David Nasca:]

It’ll be over the course of the year, Chris.

[Chris O’Connell:]

Okay. Got it. Is that liquidity deployment? The majority of the 15 to 20 basis points kind of the core NIM expansion with no further rate hikes built in?

[John Connerton:]

Yes. Yes. That is – that includes our growth.

[David Nasca:]

Yes. There’s – I was going to say, there’s two 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.

[Chris O’Connell:]

Okay. Perfect. And then do you guys have the amount of the loan portfolio that’s variable or floating?

[John Connerton:]

We have, yes. Hold on a second, right. It’s – percentage wise, it’s 25%.

[Chris O’Connell:]

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.

[John Connerton:]

It was 4% to 5% on the salary line item, Chris. And that will include the cost saves from the branches, some of the cost that most of the salary saves since we’ve redeployed those individuals and got positions have kind of – that 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 second quarter or the third quarter. Sorry.

[David Nasca:]

Third quarter. Yes.

[Chris O’Connell:]

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

[John Connerton:]

Yes. I kind of reiterate what you’re saying. We 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 8%. The reduction from the 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. Yes.

[Chris O’Connell:]

Okay. Got it. That’s helpful. And then can you remind us like as the hotel book, if it progresses so that all of its kind of coming off to criticize, toward the end of the year here and how much does that impact your allowance?

[John Connerton:]

So there’s $55 million in criticize, and we’ve shared this in past quarters. We hold about an additional 3% as a criticized asset versus typical.

[Chris O’Connell:]

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

[John Connerton:]

Yes, the – 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 our – actually our expectation is that’ll close in second – early second quarter.

[Chris O’Connell:]

Okay, great. And that’s all I have. Thanks for taking in my questions.

[John Connerton:]

Thanks, Chris.

[Operator:]

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

[David Nasca:]

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

[Deborah Pawlowski:]

Excuse me, I’m sorry. I just noticed that Richard Lashley with PL Capital on the line for questions.

[David Nasca:]

Oh, okay.

[Deborah Pawlowski:]

So Peter, can you…

[Operator:]

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

[Richard Lashley:]

Yes. Thank you. Thanks for doing the call. You mentioned the deposit betas, which is the re-pricing being better this time. What do you think about the flow of deposits? The absolute dollars, you think you can hold onto what you have or absolutely actually grow it?

[David Nasca:]

Yes. Our expectation is that we grow with the activity that we’re going to have on the commercial and the consumer side. It’ll probably be in the single-digit. Excluding our – probably our more sensitive portfolio, which is around a municipal portfolio. So there’s some probably higher sensitivity on that, that book, which is currently around $300 million, but a lot most of those are core customers. And we expect that those – 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.

[John Connerton:]

Yes, Richard, a lot of our growth to this point has been core checking in commercial checking. So that’s a pretty heavy percentage of what we’re holding onto now, early on in the pandemic and whatever is liquidity built up 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.

[David Nasca:]

And then in our projections, it was asked about our liquidity levels. We do have in that projection of our liquidity level is some assumption, like especially around the municipal dollars and some movements on those.

[John Connerton:]

Tapering, yes.

[Richard Lashley:]

Okay. So given those flows, where do you think your total cash and securities percentage ends up a year from now or so, it’s about 25% now?

[John Connerton:]

I mean not as a percentage, but I’d say from here forward, we’ll probably be about $60 million less on those two – those – added those two category.

[Richard Lashley:]

Okay. 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 five-year fixed rate loan, you might price it at closing off the then current five-year treasury plus a spread. Are you able to maintain that spread today now that the treasury rates have moved up or are you getting pushback from customers?

[David Nasca:]

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 previously to 240, but we’re probably in the 225 to 230 ranges now. We price off the federal home loan bank curved as well as opposed to treasuries, but we are seeing the spreads get pressured a bit.

[Richard Lashley:]

Yes. Which makes sense. Anything on the FinTech side or the digital side that’s worth noting?

[David Nasca:]

I – not worth noting, I will just say we have been migrating two 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.

[Richard Lashley:]

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

[David Nasca:]

We’re working on that currently.

[Richard Lashley:]

Okay. I guess two years into the acquisition of Fairport. Can you give us an update on what – how you think that went?

[David Nasca:]

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 wasn’t 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.

[Richard Lashley:]

Okay. All right. Thank you very much.

[David Nasca:]

You’re welcome. Thank you.

[Operator:]

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.

[David Nasca:]

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 second quarter 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.

[Operator:]

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