Q2 2022 Evans Bancorp Inc Earnings Call
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Greetings and welcome to the Evans Bancorp second quarter 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I'll now turn the conference over to your host there.
Pulaski Investor Relations for Evans Bancorp, you may begin.
Thank you sure Molly and good afternoon, everyone. We certainly appreciate your taking the time today to join US and your interest in Evans Bancorp.
Here with me on the call today, I have David Nasca, our President and Chief Executive Officer, and John Connor King, Our Chief Financial Officer, David and John are going to review our results for the second quarter of 2022 and provide an update on the company's strategic progress and outlook after which we will then 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 <unk> Dot com.
As you are aware, we may make some forward looking statements during the formal discussion as well as during the Q&A. 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.
Thank you Debbie good afternoon, everyone.
We appreciate you joining us for the call today, and I'm going to start with a review of the past quarter, and then hand, it off to John to discuss.
The results in detail.
Results for the second quarter were very solid driven by continued growth in commercial business lending core deposit attraction, especially checking and savings.
Strengthening margins and a diligent focus on expense management, despite the rapidly changing market dynamics all financial institutions operating currently.
The team continues to execute our strategy, resulting in the attraction of new business and market share growth with a consistent community and relationship driven focus that centers on the customer.
It is our expectation that a rising interest rate environment will drive higher net interest income and margins going forward.
During the second quarter net income was particularly encouraging as we were up 9% from the first quarter and comparatively although down slightly to last year's second quarter, we effectively covered $2 $5 million in PPP fees received in last year's period.
We experienced another quarter of significant production performance by hitting $105 million in loan closings, which was led by robust commercial real estate demand and strong progress in commercial and industrial loans.
And while net loan growth was not substantial during the quarter. We are pleased with the positive trend we see in the number of new commitments and loan closings as our teams across our footprint have been performing well in this current market.
We also continue to focus on deposit growth and while there was a slight dip in this past quarter due to seasonality of municipal deposits are core deposit balances continue to trend positively we have exceeded our expectations with core consumer checking balances and commercial deposit acquisition continues to be strong.
An area of highlight during the quarter with continued performance in managing expenses, while simultaneously maintaining targeted technology investments to enhance the customer experience and engagement with different digital offerings as well as drive operational efficiency and effectiveness.
Notable achievements include did an upgrade to our core operating system to provide new security features and processing efficiencies, including a new teller system that was implemented throughout the branch.
And the kickoff of a commercial efficiency project, which will touch all areas of commercial lending from data collection to underwriting booking and portfolio management. Our expectation is that we can facilitate commercial production and documentation and an integrated digital accountable and.
Streamlined workflow with better controls and an enhanced customer experience, we expect components of the new project to begin rollout in the late third early fourth quarter.
We discussed on our last earnings call embarking on our branch network efficiency initiative, which resulted in the closure or repurposing of three locations to date. The transition of these branches has been smooth with positive feedback the expected run rate of annual noninterest cost savings from these changes is.
<unk> $750000 and we are already starting to see the initial benefits in this past quarter.
Another critical pillar of our strategy, which we believe is a differentiator for Evans is talent and culture.
Like all businesses continue to be challenged by the market for associates competition for top performers and rapid labor cost inflation. We've had success in recruitment and key associate retention and believe this is a reflection of our culture and commitment to our associates.
We are aware that employee attitudes and perspectives are evolving and we are continuously working to drive a culture that is inviting in a place where top talent wants to work. Our culture Pulse survey was recently completed focusing on fairness collaboration and communication to determine recommendations and suggestions that week.
Can apply to continue to enhance the employee experience.
We are also excited about our recent promotion during the quarter that will help us continue our cultural momentum toward inclusion diversity equity and awareness race.
Brace Woods, who previously served as vice President of community development in commercial banking was promoted to the newly created position of chief diversity inclusion and community development officer. He is responsible for collaborating and influencing the overall development implementation and communication of the organization's inclusive strategic.
The plan.
Reis has deep ties throughout the market coming from work with the city of Buffalo and a W. M. B E Advisory and development organization as well as interfacing with several local mantra nonprofit boards his passion for community development work diversity and cultural evolution will be an asset as he takes on.
This all important role at Evans.
There are two other areas, we are taking a focused approach to.
The intersection of associates career desires and the company's needs.
First our insurance account executive development program was recently enhanced with a formalized sales process for new and existing account executives focusing on sourcing leads building centers of influence.
Winning at cold, calling and utilization of existing technologies to assist with sales processes and data.
We also completed the initial phase of our commercial banking talent development program, which consisted of detailed multi month onboarding courses and training built within our online learning management system.
Phase two of the project will utilize development tool kits to prepare internal candidates for promotion, thus building an internal commercial banking talent pipeline.
Lastly, as a community financial institution the organization, our associates tried to be positioned to play a part and assist in the community and a multitude of ways.
As you May know and May 14th our community was rocked to its core is a racially motivated mass shooting occurred in east Buffalo within the most prominent and important grocery store in the area, taking 10 lives and injuring three others.
Buffalo communities showed its resolve and resilience by coming together in response to this unspeakable tragedy as the true city of good neighbors that it is.
As a community Steward Evans is along with many other community institutions actively assisting to help make a difference and be a positive influence for equity and justice whether it be providing platforms for our associates to assist assist expanding already significant associated community involvement working.
And our public private partnership with the city to develop infill housing are donating money to the recovery fund to support systemic change aligning with our values and commitment to assure that everyone. In our community is treated equitably enable to assess every opportunity and fully realize their potential.
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, everyone. Net income was $5 7 million or $1.03 per diluted share compared with $6 3 million or $1 15 per diluted share in last year's second quarter, and $4 7 million or <unk> 86 per diluted share in the trailing first quarter of 2022.
The increase from the sequential first quarter was largely due to higher net interest income the change from prior year, largely reflected lower PPP fees and a sizable credit and provision for loan losses that was taken in last year's period.
Net interest income increased $1 6 million or 9% from the sequential first quarter driving the change as both higher average loan balances and loan offering rate being above the prior quarter due to the fed 150 basis point rate increase since March.
The betas have not accelerated to this point as the competitive landscape has not been challenging as of yet.
The slight decrease in net interest income since last year's second quarter, largely reflected the decrease in PPP fees given the deceleration in the rate of remaining loan forgiveness as the program nears its conclusion.
During the quarter, we realized 224000 and deferred PPP fees compared with 500000 in the first quarter of 2022, and two 5 million in the second quarter of 2021.
Nearly all of the original seven 4 million in 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 8 million has been recognized in income, leaving approximately $83000 of fees to be booked.
The 267000 provision for loan losses in the current quarter was driven by economic qualitative factors as GDP GDP is showing some weakness the sequential first quarter provision reflected strong loan growth while last year's second quarter had a credit due to the benefit of unwinding the pandemic effect of the economy.
Our balance sheet is well positioned for rising rates rising interest rates and as expected given recent fed actions. We saw a 27 basis point lift to net interest margin in the second quarter to 345%.
We'll talk to our net interest margin expect expectations at the end of my remarks.
Noninterest income was $4 6 million in the quarter up about 200000 over each comparable period insurance, which is the main driver within this category was up from the linked quarter due to seasonally higher policy renewals for institutional clients on a year over year basis insurance revenue was down less than 100000, primarily due to.
The operations of our insurance claims services business the.
The changes in the other income line from the sequential and prior year period was largely due to movements in the fair value of mortgage servicing rights.
Deposit service charges have seen a steady rise over the last year, mostly due to higher debit card usage.
Total noninterest expense increased 2% from the sequential first quarter and a year over year basis was down 3% as we have continued to balance our investments around our strategic focus areas and are utilizing technology to supplement our efficiency efforts.
We also are beginning to see the initial benefits of the branch rationalization.
Salaries and employee benefits, which comprise 64, 64% of total noninterest expenses remained largely unchanged from the first quarter of 2022 and second quarter of 2021 <unk>.
Advertising expense increased 259000 from the sequential quarter due to seasonal marketing campaigns.
The company's efficiency ratio was 65, 2% in the second quarter, an improvement of 150 basis points since last year's period.
Turning to the balance sheet, we continue to deploy excess liquidity into investment securities, but those balances up a 169 million since last year's second quarter. We're also using liquidity to fund loan growth over the last year as total loans increased $53 million.
Excluding the impact of PPP loan forgiveness.
Of the approximately $300 million of PPP loans originated we had just three and a half million left at quarter end this compared with $10 million.
At March 31, and 146 at the end of last year's second quarter.
Looking at the second quarter, specifically commercial loans grew $7 million.
Net originations were 87 million that compares well with a $94 million of net originations in the linked quarter and continuing much higher than last year's average originations the lack of growth during the quarter largely reflects the $37 million or 42% of originations that were from unfunded commercial real estate construction loans, which will fall.
And as construction ramps up.
Payoffs are all still also still running a bit higher than typical due to some sales of customer businesses as asset prices remain high.
We still have a healthy commercial loan pipeline of $73 million and we expect that to generate commercial loan growth as payoffs and refinances continue to normalize.
Credit metrics remain sound, despite a modest increase in nonperforming loans.
Which reflected the addition of one commercial real estate loan that is well collateralized.
Total deposits of $1 97 billion decreased 1% from the sequential first quarter due to the seasonality in municipal client balances.
Excluding municipal deposits total deposits were up $18 million during the quarter, mostly in demand deposit.
On a year over year basis, total deposits were up $85 million of 4% and reflected growth across all deposit categories with the exception of time.
At this point, assuming no further fed rate hikes, we expect to see further expansion in our net interest margin of approximately 20 basis points in the third quarter, we have not seen competition for deposit rates begin to rise, but expect some movement in late third quarter.
Any further increases by the fed including today's increase would have a positive impact as a reminder, a 25 basis point move from the fed all other things held constant with increased net interest income by $1 million annually or four basis points of total margin due to our variable rate portfolio.
With that operator, we would now like to open the line for questions.
And 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 queue. 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 is Turkey.
One moment, please while we poll for questions.
And our first question comes from the line of Alexander <unk> with Piper Sandler. Please proceed with your question.
Good afternoon.
Good afternoon Alex.
Just wanted to keep.
You can go on on that last set of comments on the NIM. John I think you said 20 basis points expected in the third quarter and that does not include the 75 basis point hike from today that's.
That's correct.
And the.
What kind of expectation for average, earning assets would that take into account I mean now that cash is kind of.
Got in closer to normalized levels it looks like in the second quarter.
Is there still some some sort of asset transitioning that is going to be down or do you think youre going to have to actually grow the balance sheet to fund loan growth.
So I think there'll be some movement in our cash into interest, earning assets I think what's going to drive. It is we do expect loan growth to still.
The whole year to still be in the higher single digits between.
Seven and 9%.
So.
That would that's really where we're looking to grow our interest earning assets.
Okay, but to fund the loan growth would you need to actually spend the balance sheet, just given sort of the liquidity position today.
It can be done with cash in and cash flows from securities.
It can be it can be done with cash we're still sitting at an approximately $80 million in excess liquidity and we plan driving those.
Putting that into use.
Great and then the $1 million annually from each 25 basis points.
Do you think that does that take into account deposit betas or do you think that some of the $1 million.
I see.
Yeah, sorry, yeah, that's everything held constant so we haven't seen our betas move where we expect betas to start to move so that would that would bring that million dollars down for every 25 basis points.
If and when base well when betas start to move up.
Okay.
And we've talked about it last time I think we talked about last time, our betas in our last cycle moved around between 30, and 40 basis points for the whole cycle, we expect with the excess liquidity that we have here our strategy is going to be to be proactive with our core customers and and adjust our rates to those.
Particular customers and with the excess liquidity that we do have as well as our deposit gathering that we've that we've had recently, we feel we'll be able to.
Most likely do better than that or there should be some probability that we do better than that from the last cycle.
Okay.
That's good color on that and then just switching gears to the to the efficiency the commercial efficiency process that youre talking about David in your prepared remarks.
Is the is the.
I guess is the goal to that to reduce or to create operating leverage and reduce expenses or is it to drive more loan growth or kind of maybe talk to a little bit more sort of the the higher level rationale for putting this in place is a catch up.
Getting the systems up to the 21st century, or what's I mean, what's kind of the the higher level of thought process behind it.
Okay I'll do that you asked about three questions here and I'm laughing, Alex because it's sort of all of those things.
We're not we're up to the 20 <unk> century, I mean, we've got good.
Loan processes and systems, but we have been growing above trend for a long period of time, there is a need to.
Address the continued scaling of that operation it will provide efficiencies to the organization, but it will also allow us to effectively.
Create some scale for the organization to grow and continue growing faster because it affects all areas. It affects underwriting operating booking portfolio management and on top of that what it will do is it will position us with.
Maybe what you'd say is it will enhance our controls as well in making sure that with this kind of volume we're diligent around our controls. So I think it's all three of those things its efficiency its scalability and the.
The control environment, So, we're gonna be making we're making investments to get better and stronger and bigger.
Great and then just can you just remind us what the branch efficiency program. The 750000, and we started to see that and I think you've mentioned that you're starting to see the very beginning of that in the second quarter, but when does that really start impacting the expense line.
It's really occurring.
The largest component of that is salaries.
Alex and that is already begun.
But by the beginning of fourth quarter all of those all.
All of those expense saves should.
Should start to be there from an annual perspective.
Great. Thanks for taking my questions.
Thanks, Alex Thanks Al.
And just as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the queue.
Next question comes from the line of Chris O'connell with <unk>. Please proceed with your question.
Hey, good afternoon.
Wanted to start off.
With the.
Originally from works coming on the books.
I heard the pipeline numbers, but.
I may have missed it but if you guys could just go through what the loan yields coming on that that'd be great.
Sure.
Yields we usually get anywhere between 202 hundred 50 off of off of our.
Funding source.
<unk> is yields anywhere between five and a half.
Okay.
And thats blended on the whole portfolio.
Yes.
No I mean, five and a half and the new <unk>.
New originations going forward, yes, yes, sorry, yes got you.
Yeah.
Okay great.
And then for the efficiency initiatives as well as kind of the branch savings.
Putting it all together.
How are you seeing.
Bottom line kind of operating expense numbers.
Flowing through into the back half of the year here.
So Chris I think the only I think the current run rate.
<unk> is a good run rate with.
With the exception of as we move through the quarters here towards the end of the year. We do look we do look at are.
What our bottom line is going to be and then how that's going to impact our incentive which we won't we usually don't know until into the third quarter. So if you look at prior years third quarters. You can see if we are doing while we will adjust the incentive calculation and so that would be an impact kind of bring up the current run rate.
Going forward, but we haven't really gotten to that point in the <unk>.
And a year yet.
We're comfortable booking that additional incentives if the performance the full year performance.
Got it.
These.
Allergy and.
Outside of the branch.
Plan.
Do these investments create a little bit of a higher expense growth run rate heading into 2023.
Or are there offsets there.
I think I think the answer to that is we will have some expense.
Run rate into 'twenty three.
We're also managing other sides of that expense, whether it's personnel and some other things. So we think the run rate that you've seen as appropriate.
Going forward you are not going to see.
Big bumps up or down we think we are at.
Good level here, so theres going to be puts and takes there.
Okay got it.
And for the deposit flows this quarter.
Most of it being driven by the Mooney the Muni decline.
How much of that do you think will come back.
Third quarter.
Yeah.
Yes.
It's going to follow the seasonality that we've had in prior years.
And usually.
Probably a good chunk of that.
Our high point, some somewhere in the first quarter and then again.
Meets that same high point at.
At the end of third quarter, beginning of fourth quarter.
So we would expect that we will.
Haven't been we're not losing any customers. So we expect that those balances should should come back.
Those high points.
Let me just add on to that Chris What you have here is obviously in New York State, Texas School and property taxes.
Our February February Slash March and then Theyre kind of October for the school taxes, so they build.
They get paid by the municipalities.
Come out of their accounts kind of in that.
<unk>.
March April timeframe and they come out of the accounts in the October November timeframe, but up to that point, they build back to those levels.
Okay that makes sense.
And then I know you guys are eventually looking to build back.
Tc.
So the 8% range.
Obviously difficult with D. A N C marks this quarter.
You know how you guys think about capital levels in terms of regulatory versus T. C.
And is there a goal or a timeline that you guys want to get back.
Toward the high 7% or 8%.
Yeah.
Well I think with the OCI impact there, where we are kind.
Kind of adjusting for that and we think that where our where our capital ratios are at this point are sufficient and we will manage.
If you adjust kind of excluding the OCI at this point.
Cognizant of it but.
But we based on the based on the makeup of our portfolio our investment portfolio we're not.
Significantly concerned around the impact from the OCI and where our capital levels are pretty good from the perspective of where we want to be.
Got it.
<unk>.
And looking ahead.
Kind of piggybacking on one of <unk> questions.
You guys grew the investment portfolio just to touch this quarter again.
Do you think that you'll be keeping that more flat or moving.
The flows into into loans as they come off going forward or do you expect that to continue to grow.
We think.
From here, we're probably at a level, that's going to stay pretty pretty consistent and will utilize our excess cash that we do have as Alex suggested for loan growth in any.
Any impacts from.
Funding flowing out because we're staying disciplined on our.
Our deposit pricing.
Okay, Great and then.
Lastly.
I know it's been.
There for a while and.
You guys.
Have the $54 million left on the criticized assets.
Hospitality book.
Any updates there.
Yeah.
How do you see that progressing over the course of the tail end of this year.
Yeah.
It's kind of consistent what we've been saying for the last couple of quarters.
The seasonal business up here most of our properties are around in our geographic area and we will be we're going to look at it pretty hard at the end of third quarter, which will be kind of the end of the season to make the assessment on those those asset and so far our understanding of.
The activity in and their performance is headed in a positive direction improving yeah.
Great.
Alright, nice quarter, thanks for taking my questions.
Thank you and risk.
Our next question comes from the line of Eric.
Please proceed with your question.
Thanks, Good evening guys.
Good evening Eric.
Just a question I guess on your commercial borrowers with.
Variable rate loans, and just trying to understand you know the potential impact to them. We've got I guess 225 basis points of hikes under our belt now.
Futures carpet suggest maybe another 75 by the ended the year as you underwrite. These loans and then to continue to monitor them ongoing suddenly a lot of these borrowers still have a lot of cash on hand, maybe more than they did.
Pre pandemic, but it but as their debt service goes up does it get to a point are there any borrowers to start to become a little bit more more stressed or do you build in enough cushion that they can withstand this and I guess, how often there are cash flows for those borrowers updated or are they seeing.
Uptick in those cash flows that could help offset or just curious about the potential.
I'm kind of like a credit developments that could result from a from the interest rate hiking cycle.
Okay I'll answer that.
First Eric Steve NASCAR.
<unk>.
Couple of things that you asked there that I'd like to address one is we when we're underwriting these.
These borrowers we stress them for increased levels. So we have several stressors that we put.
The loans through an underwriting so from our perspective.
Do we see.
Them being damaged by the rates up.
My terms that yours.
In terms of that we see the industry are challenged by the rising level of inflation, certainly, but we've underwritten these loans to be able to stomach. This. So you asked is there a little bit of a cushion in there I don't know if I'd call. It a cushion, but we certainly understand where they are with respect to stress.
Yes.
Secondly, we do get and we look at these loans at regular intervals and where we are concerned we will certainly make sure that we get cash flow statements and we're.
We are in relationship with these borrowers so we understand their businesses and where they are I think that is the difference with us as a community institution that's really.
Relationship focused we're working with them if they do experienced difficulties were usually first to know and sort of working on that so we have not seen.
That level of.
I'll call it damage yet.
But you know there.
There's significant impact here, certainly, but we don't expect it.
Hope that it's not a tremendous.
Continuing burden.
And we've written strong collateral we have guarantees we have that.
Debt service coverage ratios that are on the reasonable if not conservative side. So I think the question about do you have cushions there we believe we do.
That's great. Thanks, Dave I appreciate the detailed answer there that's all I had today. Thank you.
Awesome, Thanks, Sir Alright.
Are there any other.
Questions There sure Molly note there is all the questions for today.
Alright, well I'd like to thank everybody for participating in the teleconference. Today.
Really appreciate your continued interest and support and please feel free to reach out to us at any time.
We look forward to talking with all of you again, when we report the third quarter 2022 results and we hope you have a great day.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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