Q1 2022 Evans Bancorp Inc Earnings Call
Greetings and welcome to <unk>.
<unk> Bancorp first quarter fiscal year, 2022 financial results conference call.
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Deborah Pawlowski.
Investor Relations for Evans Bancorp. Please go ahead.
Thank you Peter and good afternoon, everyone. We certainly appreciate your taking the time to join us today and and your interest in Evans Bancorp.
On the call with me I have David Nasca, our President and Chief Executive Officer, and John Connor, and our Chief Financial Officer, David and John will review our results for the first quarter of 2022.
Excuse me 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 market closed and if not you can access them on our website at Www Dot 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 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 us.
The 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 Thank.
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 this focused 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 <unk>.
<unk> 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 inquiry.
Overall, our commercial business has been performing well as we leverage 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 a record commercial loan closings of $109 million during the first quarter and further our 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 in assistance related to the hotel portfolio. We are still actively monitoring in effect evaluating this portfolio in response to the economic impact of the pandemic as a reminder, during 2020, we classified the $81 million of loans to <unk>.
Within the hospitality industry is criticized since that time, approximately one third of the portfolio was upgraded or paid off leaving $55 million and criticized status at the end of the 2020 to 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 client's desired way of doing business.
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 have also continued to make improvements to our branch network, which included the opening of a new branch at Westminster Commons and Buffalo's E side as well as a number of Remodels and.
<unk> 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.
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 by appointment business needs over the upcoming summer. We will also be closing two branch locations one in <unk>.
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 closed into a location that is literally down the road.
Once fully executed and branches are sold sublease or leases nonrenewed. The expected run rate of annual cost savings is expected to be approximately $750000.
It is important to note that there 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're also proud to announce this quarter of $3 three 9% annual increase in our cash dividend to shareholders to 62 per share representing a trailing 12 month yield of about 295%.
Lastly, our critical strategic area of 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 associated 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 is.
Being a community of talented collaborative carrying 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 .
Thank you David and good afternoon, everyone. Net income was $4 7 million or <unk> 86 per diluted share in the first quarter of 2022, compared with $4 9 million or <unk> 89 per diluted share in last year's first quarter.
Net income was $5 9 million or $1 <unk> 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 in the fourth quarter of 2021 included higher interest income recognized.
The nonaccrual loan pay offs 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.
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 $500000 in deferred PPP fees compared with $2 4 million in the fourth quarter of 2021, and $1 7 million in the first quarter of 2020.
2021, nearly all of 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 300000 of fees yet to be booked.
The 200000 provision for loan losses in the current quarter was due to the growth of performing loans offset by a reduction in specific reserves.
First quarter net interest margin of 318% decreased 56 basis points from the fourth quarter, which was elevated as a result of higher PPP fee amortization non accrued interest.
Recognize an acceleration of loan mark impacts excluding those items net interest margin for the sequential fourth quarter was three 6% I'll talk to our NIM expectations at the end of my remarks.
Noninterest 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 of it on a year over year basis insurance revenue was down $200000, 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 lines of 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 professionals knew to commercial insurance and implement enhanced tools and technology to succeed.
Total noninterest 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 balanced our investments around strategic focus areas and are utilizing technology to supplement our efficiency efforts.
<unk> employee benefits decreased 800000, 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 costs. During the first quarter of 2021 as well as merit increase.
<unk> and labor inflation the.
The other expense line was down from the linked quarter approximately $700000 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.
Balance of PPP loans forgiven in the first quarter of 2022 was $15 million, bringing the total of the loans were given 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 refinances of refinancing of existing loans was $94 million. During 2020 to 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 nonperforming loans, which reflected just one commercial real estate relationship that continues to accrue and is well collateralized.
Deposits of $1 99 billion grew 3% sequentially and were up 6% 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 an 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 the 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 ratings.
Kris any further increases by the fed would have a positive impact as a reminder, the impact of 25 basis points move 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.
Thank you.
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One moment, please while we poll for questions.
Our first question is from the line of Alex <unk>.
But Piper Sandler. Please go ahead Sir.
Hey, good afternoon.
Good afternoon Alex.
First off just wanted to.
To follow up on that last comment you made John on the margin.
15 to 20 basis points is that off of that 306 core margin that you are that you alluded to.
So 300 <unk> was in the fourth quarter that same realm.
Relative excluding the two pieces there would be 310 for this first quarter. So it would be off of the 310.
Okay, Great and then the 25 basis points equals a million bucks per year of NII is that.
That just assumes the short end of the curve goes up right just for her fed hike and if we get I think the forward curve last outlook was looking for something like eight hikes. This year.
Heights also equal to a $1 million or is that just kind of the first couple.
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 the amount of repricing that we have on a long around with new originations and then any deposit deposit movements are included in my 15 to 20 basis points.
Okay. So if we.
But Alex origin and that that only includes the 15 to 20 only includes a movement of of that first 25.
Okay. So so so as we look at today the fed does nothing else the rest of the year. We're doing 15 to 20, assuming the fed sticks to what the forward curve says we're gonna get a.
1 million per well.
Annual income per rate hike less whatever you wind up paying for higher on.
On deposits.
Yeah, and so just as a point of reference last last cycle, we had about 30%.
Data on our deposits, we would expect probably less than that this time, just with the amount of liquidity from our own balance sheet as well as other banks.
So.
And that probably that beta probably wouldn't start to happen until we see our our expectations until we see at least probably on the short end 100 basis points. After that then the than the 30%. So we would benefit 70% of any movement after that.
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 impact NII also.
Sure I mean.
Our 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 movements, a big chunk of that movement is the origination offering rates that we're getting on the new.
The new volume that we're going to have for the remainder of the year.
Okay.
And then for the remaining part of the hotel portfolio that you need to see payment histories whats the timeframe that you need to kind of see the payment histories that over in sort of one word and he's starting to anticipate.
There wasn't anything that may be impacting or seeing those additional reserves released.
So I mean up here in Western New York, and a lot of our sicker.
Cyclical and summer is a big piece, we'd like to 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.
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.
It should we be I mean.
It was kind of a good starting points for the year or is there you know 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.
Hey, Jeremy low starting the year.
Sorry, Alex Yes, there are good start points on both of those line items I think the other line item is it.
It will not move much from where it is in the first quarter.
Salaries I.
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.
Okay. Thanks for taking my questions.
Thanks, Alex.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Chris O'connell.
B W.
Go ahead Sir.
Okay.
Thanks, Jeff.
Yeah.
Yes.
We're hoping to get.
Get some details on the.
Core NIM this quarter.
What what was there if there was any.
Non accrual recapture or.
<unk> income.
So we're at $3 18 and really.
Going down to that 310 that I mentioned earlier would be our core NIM, excluding the credit.
The credit Mark amortization and PPP, we didn't have any significant non accrual so.
Both Chris and Matt.
That was 306 for the fourth quarter, we're saying that the core is 310 for this quarter.
Okay got it.
And then.
As far as.
The balance sheet liquidity deployment goes.
Is your target.
So.
Substantial movement this quarter out of cash into securities.
Is your target still at $40 million to $50 million level for cash and do you think you'll get there.
Next quarter or.
Is it going to come through over the course of the year.
It'll be over the course of the year Chris.
Okay got it.
And 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.
Yes, yes.
That includes our growth yeah, I was going to say theres two pieces to that the loan growth is significant in that.
And the other piece is the security so it's not just the securities if that's what you're asking.
Okay perfect.
And then do you guys have.
The amount of the loan portfolio.
Variable or floating.
We have.
Yeah hold on a second.
It.
Percentage wise, it's 25%.
Okay great.
<unk>.
And then just circling back.
The Opex discussion.
The 4% to 5%.
Inclusive of the cost saves coming out related to the branch efficiency initiatives in the middle of the year.
Yeah.
It was 4% to 5% on the salary line item right.
And that that will include.
The the.
The cost saves from the branches some of the costs that most of the salary saves since we've redeployed those individuals in that position.
And kind of have been recognized and thats about app, but the facilities saves are going to be over a period of time.
As we.
The purpose of those facilities or or exit them, which.
Officially we won't close those branches of until the second quarter or the third quarter, sorry third quarter.
Okay got it.
And in terms of capital levels, I know that the regulatory ratios or at least tier one.
Held steady during the quarter.
How do you guys think about the TCE to Ta ratio.
Is there like an absolute level.
Would that it were to drop down to that.
It would start to concern you guys, even if the regulatory ratios hold it holding pretty steady here.
Yeah.
I kind of reiterate what you're saying usually our most restrictive.
<unk>.
Ratios.
Pay most of our attention to the regulatory from a 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 around 8%.
The reduction from the OCI has put us down under that but just based on our expectations of our of our.
Net income growth and our asset growth, we should be back to that you know within the year.
Okay got it.
That's helpful and then.
Can you remind us like.
As the hotel book.
If it progresses, so that all of it is kind of coming off the criticize toward the end of the year here.
How much does that impact your allowance.
So there's $55 million in criticized and <unk>.
Sure. This in past quarters, we hold about an additional 3%.
As a criticized asset versus.
Typical.
Yeah.
Okay got it.
And any.
Any color additional color outside of what was in the release.
On the NPL increase this quarter.
Yes. So it was just a loan that's a performing loan that Scott.
Got delayed in closing and that was really the only difference there.
And actually.
Fashion.
That will close in early second quarter.
Okay great.
That's all I had thanks for taking my questions.
Thanks, Chris.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please.
Star one on your telephone keypad.
Okay.
As there are no further questions.
I'd now like to turn.
The call back to the management for closing comments.
Thank you Peter and thank you all for participating in this teleconference. Today, we certainly appreciate your continued interest and support.
I'm, sorry, I, just noticed that Richard Lashley with capital.
Oh, Okay. So Peter can you.
Yes, certainly.
Okay.
Well Mr. Richard Lastly, you can proceed with your question is the line has been on mute.
Yes. Thank you.
For doing the call.
You mentioned the deposit betas.
<unk>, which is the repricing being better at this time.
What do you think about the flow of deposits absolute dollars do you think you can hold onto what you have are absolutely actually grew it.
Yeah, 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 digits.
Excluding are probably are more sensitive portfolio, which is around our municipal portfolio. So there are some.
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 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. Richard a lot of 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 on to now early on in the pandemic and whatever is liquidity built up the price sensitive deposits did their thing and we did have some run off there, but we're continuing to generate deposits currently.
In the commercial checking in the consumer checking space. So that's related to this the business that we're doing with those commercial clients and our projections. It was asked.
Our liquidity levels are we do have in that projection of where our liquidity level is some assumption, especially around the municipal dollars.
And some.
The movement on the tapering.
Okay.
So given those flows where do you think your total cash and securities.
<unk> ends up a year from now or so.
It's about 25% now.
Okay.
I mean, not as a percentage, but I would say from here here forward, we will probably be about.
About $60 million.
Less on those two.
Added those two Gallagher gallery excuse me category.
Okay.
And as you are.
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 at closing off the current five year Treasury, plus a spread or are you able to maintain that spread today now.
<unk> rates have moved up are you getting pushback from customers.
I think we're getting some pushback the spreads have come in a little bit from where they were we might have been at $2 35 previously to $2 40, but we're probably in the $2 25 to $2 30 range is now.
We price off the federal home loan bank curve as well.
As opposed to treasury, but we are seeing the spreads get pressured a bit.
Which which makes sense.
Anything on the Fintech side or the digital side, that's worth noting.
I not.
Worth, noting I will just say we have been migrating.
Migrating.
To 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.
But we haven't we don't have a ton of progress in terms of making fintech straight fintech forward investments at this moment.
Okay did you participate in any of those partnerships those funds that were set up right.
Hi, various players that recruited a lot of banks.
We're working on that currently.
Okay.
And then I guess two years into the acquisition of airport.
Can you give us an update on what you think of that one.
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 is not aimed at what were 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.
Difficult 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 with the COVID-19 restrictions have lift.
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-19 sort of hiatus, if you will.
Okay.
Alright, Thank you very much.
Youre welcome. Thank you.
Okay.
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.
Alright, 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.
Okay.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.