Evans Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Greetings. Welcome to the Evans Bancorp First Quarter Fiscal Year 2021 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. Please note this conference is being recorded. I will now turn the conference over to your host Deborah Pawlowski. Please go ahead.

[Deborah Pawlowski:]

Thank you and good afternoon everyone. We certainly appreciate your interest in Evans Bancorp and for you taking the time today to join us on our call. I have hear with me 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 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. 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 begin, I'd like to once again take this opportunity to thank all our associates for their continued outstanding efforts and ongoing commitment to support the needs of our clients and communities. It has been more than a full year now since the onset of the COVID pandemic in the US and this has certainly been a difficult operating environment, but we are starting to see light at the end of the tunnel. While we're not out of the woods yet, the first quarter felt more like a typical quarter of business operations, especially considering the other significant activities that took place this past year, with two acquisitions and our headquarters move. Overall, the first quarter marked a very solid start to the year, reflecting the strength of our diverse business model, our focused actions in support of our clients and communities, and the execution of our long-term strategy. We are reporting earnings of $0.89 per diluted share and net income of $4.9 million including a $313,000 provision primarily due to one commercial relationship. John will provide more detail, but absent to that credit, we would have experienced a release a provision reflecting solid credit quality across our portfolio and continued positive macroeconomic trends. Loan and deposit levels were up significantly year-over-year given the addition of Fairport Savings Bank, or FSB and active engagement with the Paycheck Protection Program both last year and this. In fact as part of Phase 2 of the PPP, we funded approximately 950 loans for $89 million during the quarter. The average size of a PPP loan this quarter has tended to be smaller, while 70% of the loans originated went to businesses with less than 10 employees. We estimate our work helped the businesses that receive these loans protect approximately 11,000 jobs in the communities we serve.

[John Connerton:]

....or $0.89 per diluted share in the first quarter compared with $0.2 million or $0.04 per diluted share in last year's period. The increase reflected higher net interest income due to FSB and fees earned in connection with PPP. Also, last year's first quarter had an elevated loan loss provision to reserve for the deterioration of economic trends and conditions related to the COVID-19 pandemic. The decrease in net income from the linked quarter was due to a $0.4 million increase in provision for loan loss and a $0.7 million gain recognized on the sale of our former administrative headquarters during the fourth quarter. Net interest income increased 1% from the fourth quarter of 2020 and 30% from the prior year first quarter. The year-over-year increase reflected higher average interest-earning assets as we recognize the benefits of the FSB acquisition and PPP lending. During the quarter, we realized $1.7 million in deferred PPP fees compared with $1.4 million in the fourth quarter of 2020. Of the original $7.4 million in fees from the first round of PPP, there is $2.9 million remaining to be booked to income. The second round of PPP originations produced $4.1 million of additional fees to date that will be realized over their five year terms for one forgiven. As David referenced, the first quarter provision for loan losses reflected $1.1 million in specific reserves associated with a single commercial customer relationship. This was a commercial construction loan that experienced unanticipated cost overruns for environmental cleanup. Excluding, this one relationship the bank would have realized released reserve during the quarter as we adjust for improvements in economic conditions including stabilizing employment and improving GDP numbers. We continue to monitor our hotel portfolio, and I can report that we speak with these relationships on a weekly basis. Due to the seasonality associated with many of the properties, we expect to have a better feel for their long-term performance over the coming spring and summer months. We are however making progress as evidenced by the following occupancy statistics. Excluding properties in construction, in December the average occupancy was 19%.

[Operator:]

At this time, we will be conducting a question and answer session. Our first question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

[Alex Twerdahl:]

Hey. Good afternoon.

[David Nasca:]

Good afternoon, Alex.

[John Connerton:]

Good afternoon, Alex. Hey. First off, John, I appreciate your comment on expecting NIM stability from here. Can you just talk a little bit about what underlying that assumption? Is it -- and whether or not it includes things like PPP forgiveness in the second quarter? And what it contemplates in terms of the size of the average balance sheet and liquidity, et cetera?

[John Connerton:]

Sure. I think what's going to drive the NIM. We continue to have some yield pressure down on the loans on the commercial side. However, there has been some uptick from our originations from fourth quarter to first quarter on our originations, due to the increase on the yield curve. So we're benefiting from that.

[Alex Twerdahl:]

Okay. I appreciate all of those -- all that commentary. So if I put it together, it sounds like NIM stability, plus the balance sheet growing a little bit, means the NII trends a bit higher as the year progresses?

[John Connerton:]

That's a safe conclusion, yes.

[Alex Twerdahl:]

Perfect. And then, can you just talk a little bit about the tax rate came in a bit higher? Obviously, you didn't have the tax credit impact from last year carrying through. But 26% there -- 25.2% the right tax rate to be using for the remainder of the year?

[John Connerton:]

There is some seasonality to some of the tax things that we utilize from to limit our tax rate. And so, our expectation is, it will come further down to closer to the 24% on an annual basis.

[Alex Twerdahl:]

Great. Thank you for taking my questions.

[John Connerton:]

Okay.

[Operator:]

Our next question comes from Bryce Rowe with Hovde. Please go ahead.

[Bryce Rowe:]

Hi. Good afternoon. Appreciate you taking the call here.

[David Nasca:]

Hi, Bryce.

[John Connerton:]

Hi, Bryce.

[David Nasca:]

How are you?

[Bryce Rowe:]

Hey. I’m good, I’m good. Can we talk a little bit about the -- kind of the payoff activity that you're seeing and I think it's a pretty common theme across the space. But any visibility into what you might see, as we work into the second and third quarters, especially considering the -- I guess the record commercial pipeline you have right now?

[John Connerton:]

So I'll take that. I think, just, I guess, to note on the payoffs that we've seen, kind of, as I suggested in the commentary, we're not seeing it from competition that they're taking away. There is some of that, but it's mostly that there's excess liquidity in the market, so that our current customers are paying down a lot and sometimes early some of those credits. As well as, there has been -- the market has -- there is some -- a lot of activity around M&A in our customers' industries. So we have seen those. So the good news is, we -- those payoffs that we are losing, we're not losing the competition. When we do have an opportunity to get in front of our customers, if they're looking to refinance, we typically are winning those. But we expect that we're seeing those things continue to some degree, but we think a lot of them have kind of played out to some level, but our expectation on payoffs, it should start to moderate in the second and third quarter, but we do expect that there will still be some of that going forward.

[David Nasca:]

And that's obviously in the commercial books talking. We have seen refinance and payoff activity in the consumer book and some of that we did an acquisition. We're seeing a little bit of that, but we expect that to stabilize a bit too.

[Bryce Rowe:]

Okay, okay. And then, maybe you all can speak to the opportunity in Rochester. I think you called it out in terms of percentage of originations and pipeline tied to the Rochester market. So maybe -- I mean, I'd love to hear just some commentary around what the opportunity might be, frame the opportunity for us in that market.

[David Nasca:]

All right. I'll try to do that for you, Bryce. I'm not going to – it's hard to be real specific, but I would say that we think there's opportunity. It is a bit of a smaller market. We are seeing a fairly strong or robust activity, especially in the CRE side of the house. There is a fair amount of financing tire kicking going on right now, as we talk to them. We are trying hard to make sure that we get relationships built up with C&I credits as well. The market has produced, like we said right now about 15% of the stuff that we've seen in the last quarter was coming out of Rochester. The issue we've had is getting awareness that we are – we've entered the market. We have been there. We have been there for 12 years lending. This was a boots on the ground play a little bit. And it's been a little tough to get in front of people with COVID still going on but we're starting to see that thaw a bit, where we can get out in front of people, let them know we're in the market. We did put a team out there, a lending team out there on the commercial side. They had a big mortgage operation that helped us stand up a bigger mortgage operation for ourselves. And the deposit base is five branches that again, there was – there weren't a lot of people coming into the branches. Lobbies were closed for a period of time. So all that awareness that will start to happen with being out in the market should help us get greater traction. But we think there is a fairly reasonable opportunity there. There are less – when you look at our market, our market probably has – M&T is about 63% of this market. You've got KeyCorp 17% of this market. When you look out in Rochester, M&T is more like 20%. And then you've got some other community banks out there. So we think we set up pretty well to do well in that market and we'll see.

[Bryce Rowe:]

Okay. That's a good detail there. And then maybe just a question around the insurance business, whether you've seen a little bit of growth there year-over-year first quarter to first quarter? Just curious if with the potential that we get some economy reopening. Does that give you some opportunity there on the insurance side to maybe drive a little bit of fee income growth?

[David Nasca:]

The short answer is, yes. The longer answer is, it's a little more complicated. We think that the legs of the stool are P&C, which is Property and Casualty is the commercial side. We expect bigger growth on that side. Certainly as the economy opens up talking to businesses opened. The personal lines has been a challenging growth story over the last couple of years, as some of the big players whether it's GEICO or Allstate or Nationwide, really have taken to much greater digital capacity and a lot of advertising. We've maintained our client base. It's been a little slower to grow. We've moved to a more direct service model on that which has helped us. And then the third leg of this stool is employee benefits. We acquired a company at the end of 2019. So really starting in January and we are starting to see a lot of activity not necessarily translating to sales just yet but we are seeing good activity getting out and making people aware our existing customers and then new customers. We did hire a new salesperson in that area that cuts between both Buffalo and Rochester, well known in that space and we think that's making a difference in getting the awareness there. So we do think there's opportunity as the market opens but it's going to be a little nuanced in where the opportunities are going to come from.

[Bryce Rowe:]

That’s good stuff. All right. Thank you so much. Good to talk to you all.

[David Nasca:]

Thank you.

[Operator:]

I will now turn the floor over to David for closing remarks.

[David Nasca:]

All right. I'd like to say thank you to everyone for participating in the teleconference today. We certainly appreciate your continued interest and support. Please feel free to reach out to us, John or myself, at any time. We look forward to talking with you all again, as we report our second quarter 2021 results and we hope you all have a great day.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.