Q4 2022 Evans Bancorp Inc Earnings Call
Greetings and welcome to the Evans Bancorp fourth quarter fiscal year 2022 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.
I'll now turn the conference over to your host Greg miles you may begin.
Yeah. Thank you and good afternoon, everyone. Certainly appreciate you taking the time to join us as well as your interest in Evans Bancorp and the call I have with me here, David Nasca, our president and CEO and John <unk>, Our Chief Financial Officer, Dave.
David and John are going to review the results for the fourth quarter and full year of 2022 and provide an update on the company's strategic progress and outlook.
After that we'll open the call for questions 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 <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.
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.
Please find those documents on our website or E. C. Dot Gov. So with that let me turn it over to David to begin David.
Thank you Craig good afternoon, everyone.
We appreciate you joining us today I'll start with a review of the past year, and then hand, it off to John to discuss our results in detail.
Once again proud to report on the outstanding efforts and responsiveness of our teams and successfully adapting to rapidly shifting economic conditions and environments during 2022.
After it's delivered solid fourth quarter results with 6 million in net income and 14% annualized commercial loan growth, which added a strong performance for the full year of $22.4 million and 9% commercial loan growth ex PPP loans.
These results are approached prior year record earnings despite a significant swing in our provision for loan losses, and having to replace nearly $9 million in fee income received in 2021 from extensive purchase patient in the paycheck protection program.
As you know the economy opened 2022 with tremendous liquidity from government stimulus remaining at financial institutions, and very little opportunity to invest this liquidity and the extremely low interest rate environment.
Even inflationary pressures and macroeconomic challenges from ramping supply inputs, such as labor oil building supplies in housing as well as the Russian invasion of or Ukraine.
Fed embarked on an historic level of interest rate tightening to raise short term interest rates 425 basis points and seven actions taken from March to December .
Unprecedented level of tightening resulted in an inverted yield curve, which is historically indicated potential recession.
<unk> expanded its rates for loans increased in deposit costs stayed modest until late in the third quarter at that point competitive options mirrored rate increases and money began to flow to alternative investments such as U S treasuries and higher rate deposits, putting pressure on banks to match or lose funding.
On the asset side of balance sheet loan yields rose and I'll strip the levels of deposit increases for a couple of quarters until interest rates reached a level that challenged creep projects and residential mortgages.
Overall, the bank successfully weathered and performed in this environment by delivering record commercial loan originations of $95 million of X P. P. P and significantly improved rates driving the yield on earning assets for the portfolio or the loan portfolio to 4.88%.
In relation to noninterest income it was a solid year in our insurance business with 6% commercial insurance growth and 2% personal lines growth offsetting the loss of revenue from the discontinued operations of our insurance claim service business.
We saw strong account retention price hardening and a good level of new business attraction.
While we continued to make investments and strategic focus areas. We also worked hard throughout the year to pursue efficiencies and deliver disciplined expense management to enhance returns.
This included further utilization of technology to refine back office processes, along with greater customer facing solutions centered on speed flexibility and efficiency.
We completed our branch optimization project in the third quarter, which included consolidating two branches in the southern area of our footprint closing a branch in Rochester, and converting a downtown Buffalo location to a loan production office.
The anticipated employee savings were realized through normal attrition.
The merger of the two branches has been very successful with excellent morale amongst the team as the combined larger branch is more efficient importantly, there has been no material customer defection as a result of these changes.
Additionally, we have received a purchase offer for the close location in Derby.
The net result of our efforts can be seen in the efficiency ratio, which was 62, 9% in the fourth quarter, which is our lowest level in more than 10 years.
This past year was also our largest yet and the philanthropies side as we made $400000 in total charitable contributions.
It included $100000 to the Buffalo together 514 community response fund established in collaboration with local funding organizations 100, local and national foundations and corporations and over 2000 community members. After the mass killing of 10 innocent people in a racist attack.
Jack in East Buffalo.
The fund was created to address systemic and structural issues related to racism and a lack of investment that harmed communities of color.
Of our total contributions last year, nearly 80% was directed towards underserved communities and organizations, serving low and moderate income residents.
Another area of focus and we're strides were made this past year, where our efforts and commitment towards inclusion diversity equity and awareness.
Bank appointed a chief diversity inclusion and community development officer responsible responsible for driving the overall development implementation and communicate communication of our inclusive strategic plan.
Overall, a 13% increase in ethnic minority associates was realized through concentrated recruitment efforts.
Part of our inclusive culture, we continue to achieve pay parity between genders for those who identify as male or female and across race and I think backgrounds.
We have also been successful expanding our supplier diversity program to ensure that minority and women owned businesses, we're bidding on and securing business from Evans and are ahead of our five year goals in all initiatives.
The bank has continued to focus on its return of capital to shareholders and total shareholder return for the year dividends totaled $1.26, which was up 5% over 2021 and equated to a yield of three 2%.
As we enter 2023 the focus will continue to be on loan growth customer acquisition and relationship management, along with optimizing operational efficiency and expense management to deliver returns.
This will play out against expected headwinds of margin pressure caused by rising interest rates and pricing competition and potential recessionary effects impacting the economy and our customers.
We believe our value lies in our community based customer centric model, which allows us to support serve and grow our customer base in all economic environments.
With that I'll turn it over to John to run through our results in detail and then we'll be happy to take any questions John .
Thank you David and good afternoon, everyone.
For the quarter, we delivered earnings of $6 million or $1 <unk> per diluted share, which was up 3% from the sequential third quarter and last year's fourth quarter. The increase from the 2022 third quarter was largely due to a reduced provision and lower noninterest expenses, partially offset by lower noninterest income.
The change from the prior year reflected lower noninterest expenses, partially offset by an increase in provision.
Full year net income reached $22 4 million or $4.04 per diluted share compared with the record level set in 2021 as David mentioned, our annual results were strong considering the higher provision compared with the release of allowance during 2021, along with the significant level of PPP fees during the prior year period.
Net interest income was up slightly from the sequential third quarter as higher interest income due to federal funds rate increases of 125 basis points was largely offset by an increase of in interest expense given the cost increase of interest bearing liabilities due to competitive pricing on deposit.
The decrease in net interest income since last year's fourth quarter reflected the benefit that impacted the prior year. Those included $2 4 million of PPP fees 800000 of amortization of fair value marks on acquired loans and 700000 of interest recognized from the pay off of non accrual loans.
The year over year increase in provision was largely due to strong loan growth.
So reflected was an increase in criticized loans and an increase in the specific reserve for a smaller commercial loan previously and nonperforming.
Our balance sheet benefited from rising interest rates and given the recent fed action, we saw a five basis point lift in net interest margin in the fourth quarter to 377%.
We'll talk to our NIM expectations at the end of my remarks.
Noninterest income was $4 5 million in the quarter down approximately 5% from prior year fourth quarter, primarily due to an insurance claim from boley and a reversal of an earn out relating to a small insurance agency acquisition and the other income line each recognized in the prior year.
Insurance, which is the largest contributor within the category was up 5% year over year due to higher premiums and new commercial clients.
Insurance was down from the linked quarter largely due to typically season typical seasonality in commercial lines insurance commissions.
As we mentioned last quarter, the competitive landscape in regulatory environment have brought to the forefront changes to overdraft fees in terms of how they are handled and assessed it and at what levels. We did implement changes during the fourth quarter, which resulted in the reduction in fees of approximately $100000. The full year impact for 2023 is estimated at $400000.
Yeah.
Total noninterest expense decreased 6% or $900000 from the sequential third quarter. It was down $1 4 million or 9% from last year's fourth quarter.
The primary driver of both comparable periods was lower salaries and employee benefits, which reflects prudent expense management efforts.
Our efficiency initiatives and lower incentive accruals.
Our expectation for expenses.
Run rate for the full year is between two and 3%.
Turning to the balance sheet and comparing since last year and investment security balances were up 62 million and total loans increased $100 million or 6%, excluding the decline in PPP loans total commercial loans increased $95 million or 9%.
PPP loan balances, which are included in commercial and industrial loans were less than $1 million at the current year end.
Looking at the recent fourth quarter total loans increased $46 million of that commercial loans grew three 6% or more than $39 million net of PPP and net originations were $71 million that compares with 68 million of net originations in the linked quarter, which continues to be higher than last year's average.
Asia.
We have seen a slowdown on commercial real estate side, given the rising rate environment, whereas commercial industrial has strengthened and is making up the bulk of our pipeline, which stood at $69 million at year end, we expect total commercial loan growth to be between 5% and 7% in 2023.
Our credit our credit metrics remains sound with a slight decrease in nonperforming loans on a sequential basis and low charge offs in the current quarter.
Almost 60% of our hotel portfolio has been upgraded or paid off leaving $30 million and criticized status at the end of 2022, while trends for this industry of improved or change in status for the remaining criticized hotel credit is dependent on continued positive payment performance.
Total deposits of $1 77 billion decreased $102 million or 5% from the sequential third quarter and a year over year basis were down 9%.
Deposit betas began to accelerate during the quarter and some of our more sophisticated commercial and municipal clients with larger balances have moved their excess funds to other investment options.
Of the decline in deposits approximately 60% was due to less than 10 commercial and municipal customers. These customers continue to be operating clients of the bank, but I've moved excess funds to treasuries, we have maintained consumer funding balances with the use of competitive pricing of our term products.
We will be proactive with pricing and maintain competitive rates in our markets. We expect these market conditions and pricing pressures will have an impact on our margin for the first quarter and full year period next year. The fourth quarter was a high point in this current interest rate cycle, and we expect our NIM to experienced approximately 10 basis points of compression in.
In the first quarter of 2023.
The bank does have $350 million of variable loan portfolio and expect approximately an additional $200 million of maturities.
And re pricing on loans and investments in 2023 to benefit from two additional 25 basis point increases from the fed including including the one at yesterday's meeting.
These are expected to stabilize the margins for the remainder of 2023.
With that operator, we would now like to open the line for questions.
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 he would like to remove your question from the queue for participants using speaker equipment. It may be next.
Turning to pick up your handset before pressing the star keys.
And our first question comes from Bill.
Alex Turtle with Piper Sandler. Please proceed with your question.
Hey, good afternoon guys.
Good afternoon, Alex Alex.
I wanted to start I guess kind of where your and then your comments John on funding and I'm. Just curious you know after the declines that you saw in the fourth quarter attributed to the larger customers. If you think that that's kind of the extent of your quote unquote at risk larger chunk of your customers or if you can give us some sense.
For you know what youre seeing in the first quarter or just thoughts around.
There are different ways to support the loan growth.
Yeah.
That's that's kind of what we're seeing we kind of kind of went through and more of that larger.
Blowout in the probably in the latter part of the fourth quarter and for the first quarter, we've seen kind of stabilization of that flow out and where we are obviously our pricing is keeping the consumer side on the commercial side. We think are the most sensitive have have moved away.
And we think that.
As far as you know there is some seasonality on the municipal side, we'll see some of that come back in the first quarter as the town's receive their tax receipts.
But we have seen the larger there was again there was only a very small handful of those customers and we you know we've kind.
Ring fence them.
Okay.
Would you expect in the first quarter to see your average borrowings or I guess your total borrowings increase.
Our total borrowings should actually come down a little with the municipal dollars that'll come in Alex So we would expect it to come down slightly.
Okay.
Can you talk a little bit about the pricing that you're seeing on some of that new C&I paper that are in the pipeline.
Yes, most of our C&I paper has come in at our cost of funds plus $2 50, or so so we're keeping our our spreads.
Which you know at this point is anywhere six and a half and above.
Okay.
Okay.
And I'm just curious.
I guess in terms of some of the moving parts in fee income.
At least we read about from OE are some pretty large snowstorms up in the Buffalo market I know that historically those types of things have impacted your insurance revenue.
Just curious if that's something that you think we might see in 2023 year prepay being prepared to see in 2023 or you know any.
Any other thoughts around you know whether or not the 5% growth that we saw year over year could continue into the new year.
Yes.
You kind of referred to some of the claims adjustment that we had with our claims adjusting company that we.
Went away from last year. So we don't expect to see any spikes due to kind of the weather related issues.
But we still do see that the market is hardening from a premium perspective, and we do expect that our new business.
Our growth should be consistent with what we experienced this year.
Okay, Great and then.
And the overdraft I think last quarter, you said the total year effect there would be around 500000, so you're now saying that's around 400000 or is it.
More than one.
At 400000 for the full year 2023 versus 2022. So yeah. We had 100, yes, we hit a 100 in this quarter. So it's just the difference between that.
Okay, So we're going to be.
Maybe a full quarter's impact if you can compare it to a year ago would be around $125000.
Yes.
Okay, great. Thank you for taking my questions.
Thanks Al Thanks, Alex.
Our next question comes from the line of Chris O'connell with Cade and W. Please proceed with your question.
Hey, good afternoon.
Okay.
So wanted to circle back to the margin discussion.
It seems like the deposit flows are.
It's starting to stabilize in the first quarter can you talk about what you guys are putting out there on deposit pricing in order to.
Keep your current customers.
Gain new customers and.
How do you see that progressing over the next couple of quarters.
I think on the term, Chris So Cds from a consumer perspective, that's anywhere between three and a half and 4% dip.
Depending on what market we're in.
I do think than on the savings side, where we're talking about commercial savings.
We can utilize kind of our our geographic footprint, a little bit where we don't have some business can be a little more aggressive and go.
With some promotions busy.
Business accounts that could be as high as three 5% to attract new business.
Got it.
And just I mean, given the <unk>.
Margin guidance.
For down 10.
10 bps in the first quarter and then stable.
I mean, given where you are.
Deposit costs are now at 51 basis points.
And where those new deposits and deposits are repricing.
Throughout next year.
I would think given the variable loan portfolio that the first quarter should be the least amount of impact and then there should be no pressure thereafter as the deposits continue to reprice. So can you just talk about like why that may not occur and I guess like what goes into the margin outlook and the trajectory after the first quarter.
Sure I mean I guess.
I mean, the difference between the fourth and the first quarter is to.
Just the level of borrowings that we that we had spiked at the end of or during the fourth quarter.
I think.
And it's the categories of where we were we had some dollars move out so that the fourth quarter had some demand deposits move out and particularly some of our larger clients. So that's gonna have a kind of a oversize impact from fourth to first quarter and then we do expect that stabilization.
We've said it in the past.
The last cycle, we had about a 37 to 39 beta and we still expect that so if you kind of calculate that through.
As the year goes through here, we'll get closer to a 2% cost of interest bearing liabilities with an average somewhere between $1 65 and 185 during the year.
Okay.
Hey, Matt.
I guess.
But still.
Given that the deposits are going to be repricing.
Throughout the year not just in the first quarter.
And the variable portfolios.
No stock repricing after the first quarter for the most part.
How does that foot with the flattening trajectory.
Well I mean, we have.
We have some funding that is going to come in.
In the first quarter and sticker stick around so fourth quarter has a low point in the beginning of the first quarter was a low point. So we expect our borrowings due to shrink reduce and reduce and so that's kind of the first quarter is kind of oversight from that NIM.
Hmm project.
Okay got it.
Yeah.
And as far as.
Cash balances.
Still pretty low here Ed.
$6 million or so.
Is there how do you guys see that progressing over the next couple of quarters.
I think our cash balances will stay fairly tight.
Because where any opportunity we can we'll pay down on our on our borrowings which are typically at or more towards the short end at this point.
Okay got it.
Sure.
Yes.
And for the expenses.
Yeah.
The outlooks are a little bit better I think than where it was last quarter.
Can you just talk about any seasonality that you expect in the first quarter versus the remainder of the year.
And maybe where your FDIC costs.
We will start off in the first quarter, given the higher assessment rate.
Yeah. So that 3% does include a higher expected FDIC rate.
The biggest impact is in.
On our expenses that are kind of holding down in relation to prior year is our expectation of iron in our salaries and our expected incentive that will pay out just based on the levels of goals that we have in the payout that will.
Soon so.
The fourth quarter is.
Actually kind of a good run rate.
Moving forward, and then with that 2% to 3% kind of impact as the quarters move on quarter from.
Linked quarter the linked quarter.
Okay great.
And what's a good tax rate friendship.
At 24, and a half as a good tax rate.
Great.
And then lastly.
Credit metrics all around <unk>.
Great. This quarter can you just talk about given the move in rates and kind of overall economic activity. What you guys are seeing in your market areas within your portfolio, and maybe where you're pulling back on or see additional risk.
As far as.
What the critical factors are.
Uh huh.
To keep the hotel portfolio criticized.
Coming down over the course next year.
I'll I'll answer that one Chris a couple of things one is in the marketplace, we're still seeing strength and good credit, especially in the manufacturing and the CNI side.
Commercial real estate has slowed down with the increase in rates mortgage obviously has really tightened up in terms of slowing down so from a.
Activity standpoint, that's kind of what we're seeing we've offset.
Commercial real estate growth last year, we've offset that with more C&I expectation this year.
Obviously, when you're in industry, whether it's service or manufacturing, if we head into a recession here there could be impacts are watching that.
At this point.
<unk> are a fairly benign we're seeing that across the industry and we're feeling the same way you are hearing that I'm sure across all your your.
Your discussions here, we are trying to stay very close to our customers, though because.
If we get into a recessionary environment demand is going to matter most.
Most of the people have worked through the supply chain issues that they had.
And that actually is resulting at least in the manufacturing side improving.
We're not seeing.
Any deterioration at this moment on a credit side.
So I think we're feeling.
Pretty constructively positive.
In terms of going into this we're not.
Not chasing it certainly we always talk about that we maintained our credit standards.
Loosening those John talked about the margins earlier, we are getting paid for the risks we're taking.
Not a shrinking too much on the margin here. So I think overall, we're feeling okay going into what we're seeing right now.
Watching it the only thing I would add just Chris just.
We're gonna be.
On seasonal in the upcoming year and the provision will be a little more at risk with.
With forecasts on the on the economy. So that that's something to kind of consider I guess you also asked a question about the hotels I'll go back to that you know 60% of the hotels have come out since we originally criticized them.
You have probably $30 million still left of those one of them will stay in there.
Call it $8 million to $10 million the rest of those we are continuing to watch for performance there given cycles different.
Prime periods. They are performing we don't see anything that will preclude them from continuing to repair themselves and come out over the next period of time.
Oh great.
And for the seasonal impact you guys have an estimate for that yet.
Well, yes, we'll have a we'll have some disclosures in our K when it comes out.
In the beginning of March.
Okay got it.
Thanks, Tom I appreciate you taking my questions.
Thanks, Chris.
And we have reached the end of the question and answer session I will now turn the call back over to management for closing remarks.
Okay.
Thanks sure Molly.
I'd like to thank everyone for participating in our teleconference. Today. We certainly appreciate your continued interest and support as we go through the years.
Please feel free to reach out to us at any time, we look forward to talking with all of you again, when we report our first quarter 2023 results and we hope you have a great day.
Yeah.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Yes.
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