Q2 2021 Evans Bancorp Inc Earnings Call
Greetings and welcome to the Evans Bancorp second quarter fiscal year 2000.
The 1 financial results conference call.
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As a reminder of 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.
Thank you Donna and good afternoon, everyone. We certainly appreciate you taking the time today to join US and your interest in the Evans Bancorp.
Here with me, we have David Nasca, our President and Chief Executive Officer, and John Carlson, 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.
It should have a copy of the financial results that were released today after market closed and if not you can.
[noise] access them on our website at Www Dot Evans Dot com.
And as you are aware, we may make the forward looking statements during the formal discussion as well as during the Q&A.
The supply of future events that are subject to risks and uncertainties as well as the 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 the documents on our website or at SEC Gov.
So with that let me turn it over to David to begin David.
Thank you Debbie good afternoon, everyone. We appreciate your.
Joining us for the call today as.
As we get started I'd 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 $500000 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.
<unk> 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.
<unk> conditions.
Loan originations were at record levels once again low from a cumulative standpoint total loan balance growth was muted given the heightened level of refinancing and pay offs in the historically low rate environment and excess liquidity that remains in the market combined with ongoing paycheck.
Rent with protection program loan forgiveness.
We feel we've captured the pent up demand in both commercial and consumer lending and regain the momentum that had been building pre COVID-19, which helped drive higher net interest income importantly.
Importantly, our loan pipeline remains solid which engendered confidence that we can journey.
Check growth, excluding PPP forgiveness over coming quarters as.
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.
<unk>, none of our associates, we're working on site on an average day and on July 6 we began bringing more of staff back to our new administrative office of 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.
The person we've asked these associates to work onsite at least 3 days of week, but they are welcome to work exclusively in the office, if they desire relative to their positions and responsibilities.
Overall, we have been pleased with how productive our teams have been throughout the pandemic and believe this hybrid model will be beneficial to all stakeholders as we.
We move forward and will allow us to continue recruiting and retaining top talent.
A new Bank branch office in of development known as Westminster Commons of low income senior housing project financed by the bank, which is located in an underserved market within our footprint is nearing completion we.
We are fully staffed and anticipate a grand opening during the third quarter. This will be Evans 16 branch in the Buffalo Niagara region in the 'twenty 1 branch overall.
We believe that this project will play an integral role in the Renaissance of the east side of Buffalo and we're proud to be part of this effort to support and.
<unk> of community forward.
Looking ahead, while there will be lingering headwinds we are optimistic about our future prospects. We built a strong diversified and competitive franchise that is well positioned to support our clients and their growth and expansion plans as the economy continues to rebound.
With that I'll turn it over to John.
John to run through our results and then we'll be happy to take any questions John Thank.
Thank you David and good afternoon, everyone.
As David noted, we achieved record net income of $6.3 million are of $1.15 per diluted share compared with 0.5 million or <unk> <unk> per diluted share in last year's period the.
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 of the bank incurred $2.8 million of higher noninterest expenses, largely due to FSP merger related expenses the.
Of the 30% growth.
And net income for the first quarter reflected higher net interest income and of $1.1 million lower provision for loan loss.
Net interest income increased $1.8 million of 11% from the first quarter and $3.4 million of 23 per cent from the prior year second quarter the.
The change over both periods reflected higher fees earned.
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 alone.
During the quarter, we realized $2.5 million in deferred.
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's 700000 remaining to be book to income.
The second round of PPP originations produced $4.9 million of additional fees that will be realized over their 5 year.
Terms are 1 forgiven.
The $800000 release of allowance for loan losses represent a decrease of $700000 in specific reserves associated with a single commercial customer relationship and improvements in economic conditions, including stabilized employment and improving GDP numbers.
This was partially offset by.
<unk> growth during the quarter.
We continue to closely monitor the hotel portfolio, which totals approximately $80 million and is made up of 25 credits across 15 relationships. We are beginning to see modest improvements as the economy improves and summer travel has increased of note average occupancy rates are running around 52% currently.
Loan growth, 19% at the end of 2020.
The expected opening of the U S. Canada border in early August gives us further optimism as many of the locations rely on cross border traffic ultimately the hotel portfolio continues to be well collateralized and we believe that we are appropriately reserved.
Second quarter net interest margin of 3.
6.2% increased 19 basis points from the first quarter, reflecting the accelerated PPP fee recognition and commercial prepayment income the.
The 26 basis point of growth from last year's second quarter reflects those same factors along with higher interest, earning assets and reduced interest expense as the company continued to align rates on deposits.
Compare P. P impacts the net interest margin was 338% and we believe this of stabilized near these levels.
Noninterest income of $4.4 million increased 179000 from last year's second quarter, primarily attributable to lower deposit service charges in last year's period, reflecting the temporary suspension of certain.
Certain fees to assist customers affected by COVID-19 non.
Noninterest income was down about 150000 from the linked period given the decrease in other income largely due to changes in the fair value of mortgage servicing rights.
While total noninterest expense increased for the first quarter of 2020 from the first quarter of 2021.
We believe expenses, which are a focus area are being prudently managed.
The change was largely resident within the salaries and benefits, reflecting the annual merit increases the capitalization of salary costs related to the origination of PPP loans in the prior quarter and higher software costs related to an increase in ATM and online activity.
When comparing.
In the prior year period. The addition of FSP impact of several of the noninterest expense line items, including increased salaries and benefits.
The effective tax rate for the quarter was 24, 4% compared with 25, 2% in the first quarter of 2021 and 16, 7% in last year's second quarter, excluding the impact.
Fact of the historic tax credit transaction, the effective tax rate was 25, 9% in the second quarter of 2020.
Turning to the balance sheet, the specifics and specifically loans as David mentioned, there are some items masking the strong originations we have generated so far this year since.
Since last year's second quarter of commercial real estate loans.
Comparing the $60 million in residential mortgages $26 million offsetting this is the C&I portfolio, where the where balances were down $75 million over that period, although about 2 thirds of the decline was the result of the change in PPP loan balances, reflecting SBA forgiveness.
The balance of PPP loans forgiven in the second quarter of.
Having for 'twenty, 1 was $97 million, bringing the total of loans were given to date to the $152 million. The remaining balance of all of PPP loans as of June 30th was $145.7 million or just a little less than half of the approximately 300 million originated.
Total deposits of $1.9 billion grew 4%.
Since last year's period, driven by heightened liquidity levels of commercial customers, including deposits related to PPP loans increases in consumer deposits from government stimulus payments and slower consumer spending.
That concludes my comments and we would now like to open the line for questions Donna.
Thank you of the floor is now open.
'twenty if.
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Our first question is coming from Alex <unk> of Piper Sandler. Please go ahead.
Hey, good afternoon guys.
Good afternoon, Alex Alex.
Yes.
In terms of the PPP you had 1.
The $5.7 million left at the end of the second quarter do you have the number the that was left the balance at the end of the first quarter Handy John.
We paid off the 97, yes, we paid off 97 out of just the back in it that way.
Okay all of them.
Go ahead.
Yeah.
100, and sorry, youre going to say something.
That's good.
Okay, and then in terms of the fees that remain I think you said there is 700000 left from the first round.
If I remember correctly, there was something like $4.1 million in the second round at the end of the.
First quarter.
So that I mean are there of around 4.
Million of fees total between the 2 rounds that are left that haven't yet been recognized.
The through NII.
That's correct.
Okay perfect.
And then the commercial prepayment income that you cited in the press release and you mentioned the second ago. That's in the the NIM can you break that out in terms.
More than half of that dollar impact in the second quarter.
The the say that again Alex of prepayments.
Yes, I think the commercial income.
Yeah, it's about a half a million dollars now we do have normal prepayments just in every normal.
Environment. This is a little.
Yes.
Of the coming clunky, so over the over the year, we have a.
The typical amount of.
500, thousands of high for a particular quarter, but it's about 10 basis points on the NIM, but again not all of that is is unique because it does occur.
And they through.
Through every quarter typically.
Got it kind of when you talk about the stability in the NIM, which is awesome sort of excluding the prepayments and excluding the PPP.
What are your assumptions for led.
A levels of the excess liquidity and cash.
So well.
We 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 where from where we are now we would expect that.
We would start to hopefully be borrowed through the middle or <unk>.
Hopefully the third quarter of 2022.
Okay, and I guess, what I'm getting that is in the translating a stable NIM to NII, excluding prepayment penalties, excluding PPP do you expect the NII to be roughly.
The stable as well for the next several quarters.
Well, we would expect with the growth that we have is the NII would would grow.
Okay.
And then just last from me when I think about expenses and you talked about some of the reopening of that's happening.
And getting you.
The people back in and the office is that kind of cause expenses to go up a little bit in the third quarter.
You know where some expenses are coming back some expenses will will will will.
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.
Got it great. Thanks for taking my questions.
Alright, Thanks, Alex.
Thank you. Our next question is coming from Bryce Rowe of Husky Group. Please go ahead.
Thanks, good good after afternoon good afternoon.
Good day, Hi, Hi, Bryce.
Okay.
Dave maybe you could speak to the.
The lending environment, you talked about.
The refinance and prepayment activity.
So if you could just kind of frame that against the pipeline.
How are you.
Youre seeing.
The prospects for loan growth and the second half of this year and into next.
And then again just frame it against that that the competitive environment that we're in.
Okay, I will try to do that.
So let me say it this way we had a very strong growth for the first.
Carter's as John mentioned as I mentioned.
The closings at that point, we're about if I.
The parsed it out it's about 80%.
Commercial real estate of about 20% C&I. Some of that is the result of there was a tremendous amount of liquidity in the market.
Businesses weren't the 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 Creed, So thats the pipeline.
Competitively, we feel good about the growth we've 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 were.
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're 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 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.
<unk> the answer your question Bryce in terms of.
What we're thinking about.
I think so.
Every quarter like.
I said sounded like it was somewhat elevated here in the second quarter do you have of any visibility into continued prepayment activity kind of being elevated or do you kind of expect it to the normalized as we as we move forward.
I'll, let John.
John a little more color on this but I'm going to take the high road here and just say some of the prepayment activity is elevated because we're in a historically low rate environment and theres a lot of liquidity sloshing around the system.
As soon as that starts to normalize a little bit more we think that prepayment.
Payments slow a bit.
That said.
We're 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 will slow some of that as well, but there is a big overhang on the liquidity piece here. So.
John do you want to any of the only thing I would add races that.
We're seeing of.
The decelerate.
Deceleration of refined Refis, so we're seeing it in our own portfolio. So it is slowing.
So that's 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 first quarter.
That good record.
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 3 or 4 quarters and if you are also talking about consumer loans, we are seeing a slowdown in.
The refinance activity.
So.
Monstrously, but we are starting to see a little back off on what was heavy refinance boom that everybody experienced and we're seeing more normal activity.
In the marketplace.
Got it okay.
Maybe maybe 1 more from me shifting gears to.
The 2 the allowance.
Allowance percentage came down a little bit here in the second quarter and just wanted to try to just juxtapose that against your comments about the hotel portfolio showing some improvement the U S. Canada border opening up here.
Later 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 could diminish here.
And.
In the near future.
Could could bring that allowance down.
Even even more.
So the biggest piece of what you know that we reserved for in 2020 of that.
Reserve for the uncertainty and risk in our portfolio. That's left right we have the uncertainty.
The risk around the the economy, we've kind of worked a little bit of quite a bit back on that what's left is really the 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.
Of the.
Amount of reserve that we have that could start to move the provision of 1 way or the other.
Okay, and John would you I mean would you mind quantifying kind of what that is as part of the $20 million or right now.
It's an $80 million portfolio in.
We had.
Probably an additional 4% on that on that portfolio.
Alright, I think thats. It from me I appreciate you all the time.
Thanks price.
Once again, ladies and gentlemen that is star 1 if you do want to register a question at this time.
The we're 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.
Thanks Donna.
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.
All of you again, when we reported our third quarter 2021 results and we hope you have a great day. Thank you very much.
Ladies and gentlemen, thank you for your participation you may disconnect your phone lines or log off the webcast at this time and have a wonderful day.
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