Q3 2022 Evans Bancorp Inc Earnings Call
Greetings and welcome to the Evans Bancorp third quarter fiscal year, 2022 financial results.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference Keith style.
Zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd like to introduce your host Deborah Pawlowski. Please proceed ma'am.
Afternoon, everyone. We certainly appreciate your taking the time today to join us as well as your interest in Evans Bancorp.
On the call I have with me here, David Nasca, our president and CEO and John Connor, Kim our Chief Financial Officer.
David and John are going to review the results for third quarter of 2022 and provide an update on the company's strategic progress and outlook. After that we will open the call for a question.
You should have a copy of the financial results that were released today after market close if not you can access them on our website at Www Dot Evans Bank Dot coms.
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 series and exchange can.
Mission 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 you Debbie Good afternoon, everyone. We appreciate you joining us for disclosure of our results today.
I will start with an overview of the past quarter, and then hand, it off to John to discuss the details.
Our third quarter results were solid with $25 million of revenue our strength in net interest margin lower efficiency ratio and further improvement within our hotel portfolio, we delivered quarterly earnings of $5 $9 million, which was up from the second quarter.
On a year over year basis earnings reflected the impact of a single charged off credit.
From a declination on our government guaranteed loan that resulted in a higher than typical provision during the quarter. We believe that credit was unique and not indicative of our portfolio.
Other government guaranteed loans or our longstanding credit discipline, John will provide more detail.
In October we continued to increase returns to shareholders with a semiannual cash dividend of 64 cents per common share or a 3.5% annualized return.
For the year dividends totaled $1.26, which was up 5% over 2021.
Overall lending performance has been somewhat encouraging considering current headwinds and higher rates that have slowed commercial real estate activity importantly, commercial industrial lending has been more robust and resilient in these challenging economic conditions and is responsible for a strong pipeline.
As we have discussed for several quarters due to the impacts of the pandemic. During 2020 the bank classified the entire hotel portfolio is criticized in recognition of increased risk we have been working with and supporting these clients and closely monitoring their progress as of the end of the most recent quarter. We have now had.
More than half of the portfolio upgraded or paid off leaving just $38 million in criticized status.
Well transfer this industry or improve given released travel restrictions.
And improvements in tourism and business travel the bank is looking to assure sustained performance on these remaining credits before upgrading.
On the community front, we are working in a public private partnership with the city of Buffalo, The Buffalo Erie Niagara Land Development Corporation, a K a the land bank.
A local developer and a minority and women owned realtor firm to rebuild a neighborhood by constructing in marketing up to 10 single family homes in an underserved area within the city of Buffalo.
Evans is providing the financing for the construction of the homes and will assist with mortgages for prospective new owners. The infill housing initiative is located in an area near the Westminster Commons.
We're Evans has.
A new branch and invested over $30 million in affordable housing units are homeless shelter, a charter school and a fresh food grocery store.
This innovative initiative is one that we hope will be a model to be replicated elsewhere within underserved neighborhoods in the city of Buffalo.
Internally as part of our operational effectiveness strategy. We have spent a good deal of effort focused on refining initiatives to build out more back office and customer facing solutions centered on speed flexibility and efficiency. We recently completed an upgrade to our core operating system to provide new.
Curative features and processing efficiencies in the branches.
We also kicked off a large commercial efficiency project, which will touch all areas of commercial lending, including loan application underwriting booking in servicing we plan to utilize enhanced current loan origination systems and are bringing in some new technology solutions with enhanced work streams in order to facilitate.
Commercial production and documentation in a scalable integrated digital and streamlined workflow with better controls and an enhanced client experience in total we expect to invest about $1 million in the project over a 12 month period with savings to be recognized in later 2023 and beyond.
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We believe that driving greater operational efficiency and improvement around client engagement can help us enhance and scale returns over the long term.
Another area of focus for 'twenty 'twenty three is within our noninterest income categories.
The competitive landscape in regulatory environment have brought to the forefront changes to overdraft fees in terms of how they're handled and assessed and at what levels.
We estimate these efforts while favorable for consumers will have a negative impact to our service charge income of approximately $500000 annually.
There are a number of efforts to help counter and bolster our fee income the most important of which is our insurance business. While we are entering a hardening market with higher premiums did equate to higher commissions. We are also winning new business, especially within public entity clients, such as government services and in particular school.
Six you can see the early success of our efforts in the growth of our insurance business this past quarter.
While we remain positive on our local economy, we believe our strong and diversified portfolio positions us well to continue to serve our clients and communities through a range of economic environments, such as we prospectively face 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 netting.
Net income was $5 $9 million or $1 six per diluted share compared with $7 million or $1 27 per diluted share in last year's third quarter, and $5 7 million or $1 three per diluted share in the trailing second quarter of 2022.
The increase from the sequential second quarter was the was largely due to higher net interest income the change from prior year, largely reflecting lower paycheck protection plan or PPP fees, and a sizable credit and provision that was taken in last year's period.
Net interest income was up $1 1 million or 6% from the sequential second quarter driving the change was where loan rates rising above the prior quarter due to the fed's 300 basis point rate increase since the beginning of the year.
The increase in net interest income of 6% since last year's third quarter, largely reflected the higher income from investment securities and higher average loan balances and loan rates, which more than offset the decrease in PPP fees.
During the quarter, we realized 83000 in deferred PPP fees compared to 224000 in the second quarter of 2022, and $2 1 million in the third quarter of 2021, all the fees related to PPP had been booked to income.
The increase in provision was primarily due to the charge off of a single commercial loan the loan was within our nonperforming category. Since late 2019 and was originally underwritten with a government agency guarantee the pandemic extended the time in which the guarantee was reviewed by the government agency.
In the current quarter the government denied the guarantee and we subsequently charged alone off the loan was to a local startup company that was producing a new product for loans with this risk profile.
<unk> part of the bank's underwriting decision would be the requirement to include a government guarantee.
Although we are disappointed with the agency's decision concerning to guarantee the characteristics of this particular loan we're unique and are not indicative of other commercial credits in our portfolio or specifically other loans with a government guarantee.
Our balance sheet is well positioned for rising interest rates and as expected given the recent fed actions and we saw a 27 basis point lift to net interest margin in the second quarter to 3.72%.
I will talk to our NIM expectations at the end of my remarks.
Noninterest income was $5 8 million in the quarter up approximately 12% over last year and up 25% on a sequential basis insurance, which is the main driver within this category was up from the linked quarter due to seasonally higher commercial lines insurance commissions and profit sharing revenue on.
On a year over year basis insurance revenue was up 200000, primarily due to higher premiums and new commercial clients, which more than offset the loss of income from discontinued operations of our insurance claims service business.
Changes in the other income line from a sequential and prior year period was due to movements in the fair value of mortgage servicing rights as well as the receipt of $200000 final payment in connection with our past historic tax credit investment.
Deposit service charges have been have seen a steady rise over the last year, mostly due to higher debit card usage.
Total noninterest expense increased 7% or $1 million from the sequential second quarter salaries and employee benefits drove that increase and comprised 66% of the total noninterest expenses during the quarter.
$700000 was due to an increase in bonus accruals.
On a year over year basis noninterest expense was up 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 seeing the initial benefits of the branch rationalization initiated earlier this year.
The company's efficiency ratio was 63, 3% in the third quarter and an improvement of 270 basis points since last year's similar period.
Turning to the balance sheet.
We continue to deploy excess liquidity into investments with those balances up 118 million since last year's third quarter.
We're also using liquidity to fund loan growth over the last year as commercial loans increased $55 million, which contributed about two thirds to our total loan growth of 87 million or five 3% when excluding the impact of PPP loan forgiveness.
The remainder of the growth was largely in residential mortgages.
In terms of PPP loans, we had just $1 million left at quarter end from the approximately $300 million that was originated this compared with $3 5 million at June 32022, and $76 million at the end of last year's third quarter.
During the current quarter total loans grew $13 million of that commercial loans grew $7 5 million in the quarter net of PPP and net originations were $68 million payoffs are still running a bit higher than typical due to opportunistic sales of clients' businesses as asset prices remain high.
That compares with $87 million of net originations in the linked quarter, which continues to be higher than last year's average originations.
We have seen a slowdown on the commercial real estate side, given the rising rate environment, whereas commercial and industrial has strengthened and is making up the bulk of our pipeline, which stood at $84 million at quarter end.
We expect to continue to generate commercial loan growth as payoffs and refinances continue to normalize.
Our credit metrics remains 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 87 billion decreased $95 million or 5% from the sequential second quarter due to the seasonally seasonality in municipal client balances and outflows are interest rate sensitive clients that the bank determined to be noncore, having just one bank product on a year over year basis total deposits were down less than one.
Percent.
Deposit betas did not accelerate for for much of the quarter, but the competitive landscape began to change towards the end of the period, we will be proactive with pricing where it is warranted, but will also be prudent and disciplined.
At this point, assuming another fed rate hike of 75 basis points in November we expect to see further expansion in our NIM of approximately 10 basis points in the fourth quarter.
Any further increases by the fed would have a positive impact as it remains as a reminder, 25 basis point move from the fed all other things held constant when increased noninterest income by $1 million annually or four basis points in total margin due to our variable rate portfolio.
With that operator, we would now like to open the line for questions.
Yeah.
Thank you very much sir.
We will now be conducting a question and answer session. If you would like to ask a question Keith Chris Star and then one on your telephone keypad, a confirmation turn level indicates your line is in the Christian here.
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One moment, please while we poll for questions.
Yes.
The first question comes from Alex <unk> from Piper Sandler. Please proceed with your question Alex.
Good afternoon Alex.
Hey, first off wanted to ask about it looks like your cash balances dropped.
Pretty.
Down to the $7 million and ended the quarter. So can you talk a little bit about the liquidity that you have.
Right now in sort of the cash flows from the securities portfolios that you're expecting to see over the next couple of months.
Yeah. So I mean, we part of that liquidity sure decreases the seasonality in our municipal.
Book, Alex and we'll see some increase in our liquidity, mostly during the quarter because of inflows from the municipal.
Deposits.
And as far as the as far as the investment portfolio. We see about this we'll only see about $12 million a quarter in cash.
Cash flow from that.
Okay.
And when.
Your NIM guide the 10 basis points in the fourth quarter, what does that assume in terms of average size of the balance sheet in terms of how much liquidity you expect them to come back from those municipals.
So.
Can you talk a little bit about maybe where the pressures you're seeing another deposit costs and sort of some of the successes that you've been able to have recently and possibly trying to bring in some more deposits.
Yeah, I think it.
Just to kind of revisit where we whereas the second quarter. We you know we were expecting eventually here as the rates started to rise in and we would utilize that excess liquidity. So we have been disciplined in and we've had opportunity to keep some of that that liquidity, but we decided not to us from an expense perspective, but as far as growth.
Going forward, we do have we are competitive in our on our CD side and C. D's are our main.
Product that were attracting deposits and liquidity.
And also on the on the on the municipal side, we can be selective in in on that product line and with specific customers. So those are kind of where we're going to have the opportunities to grow in each of those product lines over the next couple of quarters. Although if you look at the past.
A couple of quarters.
Alex.
Well we're flat.
Quarter over prior quarter, if you look.
Quarter over quarter third quarter or the third quarter. We did have good success in core deposits with demand checking. So we have grown our liquidity with core deposits over the last year.
But it appears that consumer sentiment has changed to wanting some.
Right.
I don't blame them.
The nor do right.
The.
Do you have that unexpected earn back on that investment or when we actually start to see some of the causes there are some of the savings show up on the P&L or is that kind of a tail end of 'twenty three event.
Yes, yes. It is a tail end of 'twenty three event and if theres going to be several places it will see the return.
Number one we will see it in savings related to labor cost, we will see it in savings related to throughput. So we're looking at a return on that over the next couple of years, but it will start coming back to US we hope by the end of the 23.
Okay, and then the overdraft of 500 K when does that efficient when does that start hitting fees.
So it will be changing some of those parameters within our system at the end of this quarter. So really a small impact for this particular quarter, but we'll have a full year impact next year.
Okay.
Thank you thanks for your questions out.
Thank you. The next question comes from Chris O'connell from K B W. Please proceed with your question.
Thanks commentary I know you guys have a couple of moving parts here over the next couple of quarters, but.
Hum.
Maybe you just talked about and updated outlook here for the near term and how you guys think that all kind of progress as we move into 'twenty three.
Sure Chris.
I think just as a just to recall third quarter is when we do assess our accrual for our bonus so that $700000 was.
Aggregating the first three quarters, so that was three quarters of our bonus additional bonus that we would've had so.
A million in total so we would expect that our salaries, which drives most of our noninterest income will be down in.
In the fourth quarter compared to the third quarter.
Just because mostly because of that that accrual difference and then going forward into next year it'll be elevated you know and we've had good success this year at around.
Around 3% and we would expect that for the full year and then next year, though it's gonna be elevated a little bit probably closer to 5%.
Got it that's helpful.
And then.
Can you talk a little about a little bit about what youre seeing in the.
The loan demand in the loan pipeline.
It sounds like Theres been.
Pretty good shift towards C&I here, but the pipeline.
Since the quarter end relative to last quarter I believe on the total.
And so just how you're thinking about the CRE book and whether that.
Shows any of that growth over the next couple of quarters here and there.
There will be downward pressure there.
And how that pipeline kind of flows into the total loan growth.
For the next few quarters.
I'll give you I'll give you the top level answer if John wants to add to that he can add to this the pipeline has been building we have seen good activity headed into the quarter. So you haven't seen the growth.
In the pipeline as you mentioned that growth has been predominantly.
Probably two thirds or more of that has been C&I lending we are still seeing commercial real estate activity. There is some refinance activity and that so you know that wouldn't count as necessarily growth, but we also did a fair amount of construction over the past year and you will see draws on that start.
They happen, where you may not have seen that money come out.
Prior to this point so we expect.
I don't think you'll see that that turns a little bit, but I don't think you'll see a decrease in portfolio as a result of not getting.
A lot more cree or getting more C&I, even cree at this point.
C&I portfolio tends to.
The money out.
Immediately as opposed to sometimes some of the construction and real estate portfolio is over a period of time withdraws as you know so.
I hope that answers your question a little bit.
And on the Muni side.
I thought that last quarter was a seasonal outflow quarter in that.
Usually when you starts to come in towards the end of our industry Q here I missed the seasonal inflow quarter, and maybe just a little bit of color around the quarter quarterly seasonality of that book.
Yeah. The end of third quarter, Chris is there's kind of a low point.
Taxes are collected for the for the townships mostly in October .
So so fourth quarter is an inflow, whereas third quarters, an outflow at school districts use their dollars and then we then then what comes in in fourth quarter or are there other townships and it's a smaller level, but it's the same same.
The same way for school.
School districts at the beginning of the year first and second quarter not to the magnitude you see at the end of the year obviously.
Okay got it.
That's helpful.
And then just on the on the on the credit side.
It sounds like.
Guaranteed loans is unique but.
<unk> had a little bit of comment on the Npls in the CRE and maybe just a little bit of color around that.
That credit and.
What you're seeing from.
The strength of the consumer base within your markets.
And overall credit going forward.
And I think that the hotel book.
<unk>.
What is going to be.
Assessed at some point around now and just the timing and kind of how you're looking at that assessment.
When that might come back on.
Sure.
The NPL increase and the hotels have a.
Common shared.
So what does the.
The loan that went into NPL is one of our hotel portfolio out of our hotel portfolio. So as we've said from the start out of the 80 million that originally went into criticized.
We will continually assess the performance and we had different levels of operators that were in good good.
Better shape than others in worse shape than others, but the one that actually went into nonperforming this quarter.
To to.
To make sure that they're getting the best efficient productive use out of that property and we feel that based on the LTV, especially at the very low it's under 50% LTV.
And the and the and the position that places from a geographic perspective, we're very comfortable on that particular piece of property.
But as far as what's remaining out of the $38 million. That's obviously eight of that that's around $8 million.
Of what's what's in the hotel book, but all the rest of it. We're continually some are going to perform we're going to have better assessment.
Recur and we did upgrade some this quarter to the tune of around $12 million and our expectation is we'll continue to improve in the fourth quarter. The remainder of the $30 million that arent in nonperforming and we think some of that will happen in fourth quarter and probably a little more.
In the first quarter as we get a full some need of somebody in a full year look at it and we'll have that at the end of the year.
Got it.
And then just any update as to.
The seasonal impact for the start of next year.
We're still determining.
Determining the.
The impact of that and we will we'll have a further communication and disclosure in the first quarter.
Got it that's all I had thank you.
Thanks, Chris.
Thank you ladies and gentlemen, just a reminder, if you'd like to ask a question Keith Chris Star then one.
The next question comes from Erik Zwick from Heska. Please proceed with your question Eric.
Good evening guys.
Hello, Eric.
Just one question for me today, it's been a couple of years since you completed your last whole bank acquisitions.
Acquisition, just curious how you view the opportunities today, if theres anything you.
You know out there you continue to review deals is there anything from a strategic or a geographic standpoint that that looks attractive and maybe remind me kind of what the potential target size range would be of deals you would consider undertaking.
I'll answer that.
Question is.
So I go back a ways in this market and I would say as we've talked about as many of your counterparts in the investment Bank would tell you.
This market and contiguous areas are kind of devoid of a lot of opportunities there.
This market has consolidated over a period of time with people like <unk> and first Niagara.
To a lesser extent in this market community Bank systems.
And there is really not a lot of opportunity to do meaningful things, we were opportunistic and we will be opportunistic if something were to come along that strategically made sense are the smaller organizations 200 300 million, while they might add a little half then maybe a little bit of strategic benefit.
Benefit if they were available or generous generally legacy banks. They are generally a family owned or things like that where they're not really motivated to do anything and they really wouldn't do much for us. So theres not a lot of real big opportunity in this market place to do that that said if there was.
As an opportunity and we'd go you know.
I don't know anywhere.
Towards Albany for example, if there were opportunities we know this market is very similar but.
We would say we'd try to do something where a $2 billion bank, we try to do something in the 500, maybe up to $750 million range, where you're really.
Mitigating your risk of a whole bank acquisition, but there aren't a real a lot of opportunities to do that is what the bottom line is.
Thanks, I appreciate the color on that and I, just kind of just reading through the lines. There. It sounds like you had then prefer to focus on.
Organic growth in your existing markets as opposed to jumping to something further away if they're not contiguous opportunities is that correct.
That's certainly true that's been our ammo from the beginning.
We have been an organic grower, we continue to grow at a pace that we think is pretty reasonable.
Reasonable and significant comparatively.
The last couple of years have been interesting years, but.
We line up against people like <unk> T and keycorp in this market and we have been growing over time.
We have a different I'll say a different approach to the market in terms of relationship status in a commercial driver as we've talked about but I'd also say that.
We would look at an opportunity if it added and was accretive to our shareholders in terms of strategically, but we don't see a lot of those opportunities.
To do that so we're going to do it.
Our franchise value accretive way, which is organic.
Makes sense, thanks, and I actually do have one other just curious.
In terms of the tax rate any.
Changes to the outlook for the tax rate at around <unk> into 'twenty three are still pretty much around the call. It 24, 525 range plus or minus a little bit.
That'll be that'll be a stable rate for this for the rest of it for this quarter or the coming out of Florida in 2023.
Great. Thanks for taking my question today.
You're welcome thank you.
Thank you at this time no further questions I would like to turn the call over back to David Nasca for closing remarks. Thank you Sir.
Thank you Claudia.
Thank you all for participating in the teleconference today and for your questions. We certainly appreciate your continued interest and support please feel free to reach out to John and myself at any time, we look forward to talking with all of you again, when we report our fourth quarter 2022 results and we are making some trips to some invest.
Conferences, so we look forward to talking to people at those conferences as well. So we hope you have a great day and thank you for joining us again.
Thank you. This concludes today's teleconference. Thank you very much for joining US you may now disconnect your lines.
Okay.
Okay.
Okay.
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Yes.
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