Q3 2021 Evans Bancorp Inc Earnings Call
Greetings and welcome to the Evans Bancorp third quarter fiscal year 2021 financial results at this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Now I'll turn the conference over to your host.
Deborah Pawlowski Investor Relations for E V and you may now begin.
Thank you and good afternoon, everyone. We appreciate your time today and joining us for the second third quarter 2021 earnings call for Evans Bancorp.
On the call today, I have David Nasca, President and Chief Executive Officer, and John Connor, Kim Chief Financial Officer, joining me here, David and John will review our results for the third quarter of 'twenty, One and then we will open the call for questions.
We released our financial results just after the market closed today and you can find that release on our website at Evans Bank Dot 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 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 doctors.
It's filed by the company with the Securities and Exchange Commission. All of this can be found on our website or at SEC Dot Gov.
So with that let me turn it over to David to begin.
Thank you Debbie good afternoon, everyone. We appreciate you joining us for the call today.
The third quarter produced record results for Evans highlighted by earnings of $7 million or one point to seven cents per diluted share.
This compared with $4 5 million or 84 cents per diluted share in last year's period and up 11% from $6 3 million in the second quarter of this year.
Results were supported by what has been strong loan production throughout the year.
Paycheck protection program P. P P fee realization and credit quality improvements, reflecting underwriting strength and proactive measures with our hotel portfolio, resulting in upgrades and credit risk ratings of several relationships as a reminder, due to the impacts of the pandemic the bank in the third quarter of last year.
Worked with its hotel operators to assist in providing relief until conditions improved and classified the entire hotel portfolio is criticized in recognition of the increased risk.
It's a great majority of these properties are seasonal in nature. The bank provided an interest only period from last year's third quarter through this summer coinciding with the high point of demand in those in the hotels season.
At the end of the recent quarter, all but one of those relationships have begun paying principal and interest and have paid all deferred interest.
As a result of the payment performance and current operational results, we determined that $20 million of the $80 million portfolio would be upgraded out of the criticized loan category and only one relationship for $2 2 million that was unable to resume scheduled payments would be downgraded to nonperforming.
Although the remaining portfolio has shown improvement in occupancy rates and all amounts due had been paid the bank is looking to establish sustained performance on these credits before upgrading.
Approximately half of the one and a half million dollars provision recapture during the period was related to the decrease in criticized loans.
Want to briefly touch on commercial loan growth, which is one of the drivers of our performance and John will provide more specific detail.
We are generating strong loan production this year, but P. P P forgiveness and higher than typical payoffs in this historically low rate environment continue to provide headwinds to our overall loan portfolio growth.
The third quarter continued to be very active for PPP loan forgiveness and.
And through the end through the quarter and about 75% of total PPP loans have been forgiven and we expect the majority of the remaining round two payoffs to occur during the next two quarters.
We have continued to capture consumer lending demand and regained momentum with commercial real estate with tremendous liquidity and client businesses commercial and industrial lending his lagged, including lower line usage, though there are encouraging signs by the return of more C&I loan opportunities, which today make up approximately.
<unk>, 30% of our pipeline.
Our priority continues to be utilization of excess liquidity, we are strategically adding talent to supplement our own efforts, both within our legacy market and new market area in Rochester, and early indications have been positive as part of our strategy. We have spent a good deal of effort focused on refining initiatives.
For next year, as we build out more client and operating solutions centered on speed flexibility and efficiency.
Well, where are we in the process distribution channel enhancements and operating efficiency pilots scenarios are encouraging.
Ultimately, we believe greater operational efficiency can be head and with an overall improvement around client engagement, we can enhance and scale returns over the long term.
Lastly, as anticipated a few weeks ago, we held the Grand opening of our new branch on the east side of Buffalo, a majority minority neighborhood.
Marking our 16th branch in the Buffalo Niagara region, and twenty-first branch overall this was part of a larger development known as the Westminster comments are low income senior housing project financed by the bank we.
We look forward to supporting the Renaissance of neighborhoods in the east side of Buffalo.
With that I'll turn it over to John to run through our results and then we'll be happy to take any questions John.
Thank you David and good afternoon.
Okay.
Thanks, Tom.
16% from the prior year third quarter, largely driven by PPP fees, lower interest expense and a higher level of commercial prepayment fees.
When compared with the sequential second quarter net interest income was down approximately 1% due to the deceleration of PPP and prepayment fees.
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 1 million in deferred PPP fees compared with $2 5 million in the second quarter of 2021.
Nearly all of the original $7.4 million in fees from the first round of PPP had been booked to income.
The second round of PPP originations produced $4 9 million of additional fees of which $1 7 million has been recognized in income.
At the end of the third quarter $3 2 million in fees remain.
Yeah.
The $1 5 million release of allowance for loan losses in the current quarter included.
$7 million related to a decrease in criticized hotel portfolio.
Criticized hotel portfolio loans and half a million dollars reduction in specific reserves, resulting from payments received from one commercial customer relationship.
Third quarter net interest margin of 3.48% decreased 14 basis points from the second quarter, reflecting lower PPP fee recognition and commercial prepayment income the 29 basis point growth from last year's third quarter reflects higher interest, earning asset PPP fee amortization commercial prepayment income and reduced <unk>.
Just expense as the company continued to align rates on deposits.
Excluding PPP impacts the net interest margin was $3 to $3 two zero percent as loans from the second round of PPP are forgiven, they're adding to cash liquidity the bank as per Matt programmatic in redeploying these funds into assets, including investment, we're taking advantage of market opportunities, which.
Extend the period of deployment as these funds are redeployed and as expected. The net interest margin will improve to a level of 15 basis points higher.
Noninterest income of $5 2 million decreased 700000 from last years third quarter, primarily attributable to a gain on sale of investment securities recorded in the prior year period.
Noninterest income was up 739000 from the linked period, largely due to seasonally higher commercial lines insurance commissions and profit sharing revenue. We also continue to see an increase in deposit service charges, which were up around 9%.
While total noninterest expense increased from the second quarter of 2021, we believe expenses, which are focus area are being prudently manage salaries and employee benefits costs increased 565000, or 6% from the sequential second quarter, and $1 8 million or 23% from last year's third quarter, a large driver of the chain.
<unk> was a return to more normal incentive accruals were up <unk>.
<unk> 6 million during the third quarter of 2021, compared with 0.7 million reduction of incentive accruals in last year's third quarter.
Additionally, we like we like many businesses are contending with labor inflation as we have made a number of strategic hires in support of our continued growth.
The effective tax rate for the quarter was 25, 6% compared with 24, 4% in the second quarter of 2021, and 11, 8% in last year's third quarter, excluding the impact of a historic tax credit transaction. The effective tax rate was 25, 6% in the third quarter of 2020.
Turning to the balance sheet, and specifically loans that David mentioned, there are some items masking the strong originations we have generated so far this year.
Total loans decreased to $83 million from the second quarter of 2021, the commercial portfolio decreased $97 million from the prior period, primarily due to PPP loan forgiveness.
Excluding PPP commercial loans decreased $28 million from the second quarter.
On an annualized basis, the bank's average net originations of new commercial loans, which excludes refinances of refinances of existing loans was $256 million through the first nine months of 2021. This compares with an average net origination of $235 million for the previous four years, although the bank has experienced a strong <unk>.
Duction year with respect to commercial loans, including the building of a solid fourth quarter pipeline. The interest rate environment has driven elevated payoffs.
Current year quarterly average commercial loan payoff was $43 million. This was more than double our typical average which has been $21 million over the previous 16 quarters. The payoffs are mostly due to customers financing commercial real estate with conduits or government agencies and not with competitor banks.
The bank remains disciplined in not relaxing its credit standards to chase the terms of these other funding sources, which structured longer maturities nonrecourse on aggressive rates we.
We are seeing some deceleration in these payoff levels and anticipate they will gradually subside.
The balance of PPP loans forgiven in the second quarter of 2021 $69 million, bringing the total of loans forgiven to date to $222 million. The remaining balance of all PPP loans as of September 30th was $76 3 million or about a quarter of the approximately 300 million originate.
Total deposits of $1 9 million grew 5% 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.
During the third quarter, we paid a semiannual cash dividend of <unk> 60 per share, bringing the total cash dividend paid during 2021 to $1 20 per share, which was up 3% from the prior year.
That concludes my comments and we would now like to open the line for questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question is from Alex taught out with Piper Sandler. Please proceed with your question.
Good afternoon.
Good afternoon, Alex how are you are you out.
Oh, well, thanks want to start off on I'm sort of asking about some of the commentary John you had on the on.
On the loan production year to date and some of the trends there and.
Certainly a good.
Year, so far for new originations would you would you say that that's attributable to the augmentation of the lending team.
Or what would what do you think is really driving that.
The higher level of originations versus prior years.
I think it's.
Two fold. It is it is we have put on talent in the commercial loan.
Group.
In both markets, both Rochester, and Buffalo This year earlier this year than they have in those.
Those ads have added two to that volume.
But also I think there has there has been some opening up.
Especially on the commercial real estate side of projects that are starting and then also we've been with the lower interest rate environment.
For those credits that we feel that are going to meet our underwriting profile. There is a lot more refinancing activity for us to go after and we are taking some of those projects and business credits.
Credits away from other banks and that's a testament again to the talent that we've acquired and the talent that we've historically had here.
Okay.
Okay.
So as you kind of think through.
I don't know if you can elaborate a little bit more on sort of the progression of those originations if its I don't know if its linear I'm sure the pandemic through a bit of a wrench in it for last year.
But if you are kind of looking forward and sort of trying to.
Correlated to the size of the lending team and some of the opportunities.
To hire additional talent out there would you say that as you head into next year that that number should continue to grow.
Yeah, our expectation is that our our production.
Production will grow next year from this year and it's specifically based.
Based on the talent that we've put out.
Right.
Okay.
And then you made a comment about the NIM and I think you said that if you redeployed liquidity from PPP. It would add about 15 basis points I missed exactly what you said I was hoping you could repeat that and then if it was just 15 basis points kind of what the assumptions are on what that would be.
What exactly what's going on there.
Sure I mean.
Sitting on a lot of cash as the cash comes back from PPP payoffs and.
Our plan to put that put those those dollars to work either in loans or.
Or we are starting or we have a purchasing.
Plan of investments, putting it to work in investment coming out of cash even in the investment our expectation as to how we deploy those into interest earning assets over a medium period of time.
We're not buying all of our investments all at one point in time, we're taking advantage of different opportunities in the market as rates move around a little bit.
The benefit into our benefit and when we take advantage of those our expectation is as we put that cash to work.
Our current ex PPP.
Margin of $3 20 should.
Elevate to the mid to mid 300, <unk>. So that you know about $3 35.
On a run rate that makes sense.
Yeah.
Okay and then David in your prepared remarks, you were talking a bit about some operating efficiency pilot programs. As I was wondering if you could just repeat that and sort of elaborate a little bit on some of those programs.
Yeah, we've been looking at opportunities to utilize technology to increase efficiencies and operational.
Bob.
Tenants here.
We are also looking at other opportunities to manage the expense base as we always do.
But we did some pilot programs this year with some technology solutions.
We brought in some people that have some background.
Things like robotic process automation, we're looking at.
We did I'll give you. An example, not that you asked for it but we looked at Reg E disputes, which are highly intense.
Disputes to do the research on and we found out that the pathway. There we could cut several hours 14 hours out of our processing.
And really reduce the manual effort there because they were pretty standard operations. So there's things like that that are showing good.
Opportunity or good prospects, we haven't fully laid that all in but we're testing some of these things and we're hopeful that those expense kind of saves will help.
Reduce some of the manual efforts and really increase our digitization of process.
Okay, and kind of as you think through some of those programs and sort of the timeframe and the objectives associated with those would you say that you'd be implementing some of these technology platforms to if they prove to be as effective in that example that you just laid out I mean is that something.
That will be implemented in 2022 and is the objective kind of just to keep expenses flat from where they are today are you looking to reduce.
What's the.
How should we be thinking about it from a from a modeling standpoint.
Okay, well I'm going to I'm, not I harken back to something we've talked about for a lot of time I think the issue continues to be scale for organizations right. Now. So we continue to look for opportunities to utilize whatever resources, we have whether it's human talent or whether it's digitization to continue.
<unk> expenses I would say when you ask us if we're scalable at $2 billion, we're continuing to push forward with that so when you model expenses Theres still a lot of headwinds coming at us from an expense build standpoint, we've added talent.
So we're looking to offset that whether it's.
In terms of operationally, whether its terms in client facing technologies and.
We're implementing those on a regular basis, they're not it's not just one piece of software.
<unk> process, driven a lot of it so when you're asking should you model. We don't think there's a decline in let me say it. This way we don't think the pressures that are coming at us from an expense base.
<unk>.
Standpoint.
Our ameliorated during the next year, we think margins are still under challenge for the next year.
In terms of the expense base is coming at us, but so when youre looking at it we expect to kind of continue to build expenses. The way we always have we.
We have had some inflation with labor as John talked about so I I don't think we will we will model.
On a global basis.
Uh huh.
Crash of expenses down, but we will continue to try to work every bit of opportunity that we have to continue managing those.
Great. Thanks for taking my questions.
Okay.
Youre welcome.
Thanks, Phil.
And our next question is from Bryce Rowe with all of the group. Please proceed with your question.
Hi, Thanks, good afternoon guys.
Maybe.
Just wanted to continue continue the discussion around.
Loan production in some of the elevated levels of prepayments.
Curious if you are in your pipeline if youre if youre seeing.
The pressure from from prepayments on the ability to grow the loan portfolio on a net basis, if you're seeing that lead up a bit here as we as we're early in the in the fourth quarter and kind of what's your what's your thoughts might be next year.
As you know.
As you look at the level of potential potential prepayments.
So price was down I think.
This year was a high point.
Think it's going to get back to normal.
Our expectation is doesn't get back to normal until the latter part of next year.
I kind of gave some numbers there where our typical over a long period of time for 16 quarters or four years, we've been at about $88 million in pay offs in a particular year that doubled this year, we see that decelerating gradually through the fourth and first quarter.
And getting back to normal, but not until the second part of the second part of next year.
Okay. Okay. That's helpful.
And then what I wanted to ask about the allowance.
And different components within that allowance. So you guys laid out.
Laid out well the the hotel exposure and.
Some of it some of the upgrades that you've had and that being a big driver for the reserve release here this quarter. So.
If we're looking at the loan portfolio as a percentage of the allowance as a percentage of loan portfolio ex PPP, we're down at 117 basis points give or take.
What's what's your outlook in terms of.
Where where that can get to I think we're at a point now that we're even lower on a percentage basis than we were heading into COVID-19.
So just kind of curious how you think about the way the allowance might might trend going forward here.
So I think the allowance level I think some of that is.
So all of that is we're going to continue right. We still have another $50 million in hotel.
Criticize our expectation on those whats remaining in there it's going to improve and we needed to give these this particular group the remaining group a little more time to analyze and determine their ability to continue to pay P&I, even though they are currently paying P&I.
So they needed a little more time, so there will be as those do improve that will.
Dampen our provision a little bit as we expect that we will be taking back some benefit there, but as far as the total overall allowance I think.
It'll itch after the noise has done I think the one in the 120 is where we expect that our provision would typically say.
Okay.
And that'll be based right it'll be based on growth as we always say in that.
Right Okay great.
I think the other questions I had were asked and answered so I appreciate your time.
Thank you thanks, Brian.
Okay.
We have reached the end of the question and answer session I will now turn the call back over to CEO Navy naphtha for closing remarks.
Thank you.
I'd like to thank everybody for participating in the teleconference. Today. We certainly appreciate your continued interest and support and please feel free to reach out to us at any time, John or myself, we look forward to talking with all of you again, when we report our fourth quarter 2021 results and we hope you have a great day. So thank you all.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Thank you.
[music].
Yeah.
[music].
Yes.
[music].
Okay.
Okay.
Yes.
[music].
Yes.