Q1 2023 Evans Bancorp Inc Earnings Call
Greetings and welcome to the Evans Bancorp first quarter 2023 financial results.
A question and answer session will follow the formal presentation.
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At this time I'll turn the conference over to Deborah Pawlowski Investor Relations for Evans Bancorp.
You may now begin.
Good afternoon, everyone and thank you very much for joining us today. We appreciate your interest in and there is bank Corp and.
Anyway on the call with me I have with me here, David Nasca, our president and CEO and John Connor, Chief Financial Officer, David and John are going to review the results for the first quarter of 2023 and provide an update on the company's strategic progress.
Don't know.
After that we will open the call for questions.
It 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 MSA dotcom 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 and are subject to risks.
Certainty as well as other factors that could cause actual results to differ from what they 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.
That let me turn it over to David to begin David Thank you Debra.
Everyone. We appreciate you joining us today.
I will start with a review of the past quarter, and we'll then hand, it off to John to discuss our results in detail.
And delivered solid results during the quarter.
It is important to note that we are a strong community bank that has been operating for more than 100 years in a consistent and resilient way in a slow and steady market. We work in a range bound market, which does not see high peaks are the resulting deep troughs.
With a diversified client base and focus on quality commercial and consumer customers, we have weathered uncertain environments before and continue to do so.
Despite being buffeted by macro factors, including the most rapid ascent of fed rates in history bank failures, driven by risky activities and negative sentiment in the financial industry before performance. We have continued to drive our strategy forward and focus on initiatives that we can control our focus.
It remains on cultivating core relationships managing expenses and delivery of our business, maintaining credit risk discipline, making strategic investments to optimize operations reduce operational risk and improve our customer interactions.
It is the blocking and tackling of traditional community banking with appropriate risk management and making sure. We are in a position of strength to capitalize on opportunities as they present themselves.
With that said during the past quarter, we realigned our leadership teams to provide intense focus on our strategic pillars growth operational effectiveness and digital migration.
Talent culture, and community financial stewardship, inappropriate risk and controls guardrails.
We believe these internal changes better aligned corporate responsibilities with our strategic plan, while fostering collaboration and accountability.
Highlighting some of the results for the quarter.
We delivered $5 $8 million and net income, which was up 22% over last year. This result does reflect a provision release, but absent that we were still pleased with the performance given the margin pressure caused by rising interest rates and pricing competition.
Given inflationary pressures and historic fed increases in rates the cost of interest bearing liabilities rapidly accelerated during the quarter as competition for deposits intensified and customers looked for options with greater returns.
<unk> does not have a material concentration of uninsured deposits and has maintained funding balances with the use of competitive and relationship pricing within our products is average deposit balances decreased only 1% in the quarter and in fact, when looking at spot balances at the end of the <unk>.
<unk> total deposits were up 4% from the previous quarter.
On the asset side of the balance sheet loan production during the first quarter was solid as we continued to build a diverse portfolio of high quality loans with average balances up 5% year over year and up 1% from last quarter.
Equally important credit trends in the first quarter continued to be favorable.
The yield on loans improved both sequentially and year over year, but the increases are now being outpaced by deposit costs as reflected in NIM contraction. We expect these market conditions and pricing challenges to persist and pressure are emerging as John will discuss in more detail.
While focusing on expense management, we are committed to strategic investments in people and technology to better scale, the organization drive future efficiencies and improved customer facing solutions for better experiences.
Some examples include a new digital platform with live customer chat functionality enhanced capabilities within the commercial loan servicing and processing system and enhancements in credit and portfolio management to reduce risk and create opportunities for efficiencies.
During the quarter, we completed the sale of the two properties in the southern tier market. There were part of our branch rationalization initiative completed towards the end of last year.
Cecil or current expected credit losses methodology was implemented during the quarter, which John will also cover.
As we look ahead, we expect to continue to confront headwinds and are doing all that we can to support our clients and the community in a thoughtful profitable way, while addressing volatility and risk as we have been able to do through many cycles 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 $5 $8 million or $1 six per share per diluted share, which was up 22% or $1 1 million from last year's first quarter. The.
The increase reflected higher net interest income and a benefit from the change in provision for credit losses, partially offset by lower noninterest income.
The decrease from the sequential fourth quarter was largely due to a reduction in net interest income partially offset by a release of allowance for credit losses.
Net interest income was down 10% from the fourth quarter as higher interest expense resulted from intense competition pressure on pricing of deposits, which accelerated during the quarter. This more than offset the 4% increase in interest income, which was driven by growth in our variable rate portfolio is following the federal reserve's continued increase in rates of 50 basis.
<unk> points during the quarter.
The 5% growth in net interest income since last year's first quarter reflected an increase due to the interest rate environment and expansion of interest earning assets over the past 12 months.
With increased interest expense as a result of higher deposit costs. We saw 31 basis point decrease to net interest margin in the first quarter from the fourth quarter to $3 four 6%.
I will talk to our NIM expectations at the end of my remarks.
On January 1st 2023, the company adopted the current expected loss methodology for estimating and accounting for the provision for credit losses, which is commonly known as C. So the impact of seasonal was $2 7 million addition to our allowance for credit losses, and a $2 million net of tax was booked to capital as of beginning of period adjustment.
The benefit of 654000 in the in the provision for the quarter was due to lower loan balances qualitative factors related to home price moderation and lower specific reserves unimpaired loans.
Noninterest income was $4 1 million in the quarter down approximately 7% from the prior year's first quarter, primarily due to movements in mortgage servicing rights and lower loan fees.
Compared with the 2022 fourth quarter noninterest income decreased 8%.
The sequential quarter included income from a gain on sale and rents collected from an Ohio property.
Insurance, which is our largest contributor within this category was up 6% year over year and 10% from the linked quarter due to increased profit sharing higher written premiums and new commercial clients as.
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 in a SaaS and at what levels. We did implement changes during the 2022 fourth quarter, which resulted in a reduction in fees of approximately 70 to $80000 with the deposit service charges line.
Total interest noninterest expense decreased 3% or $400000 from the sequential fourth quarter and was relatively flat with last year's first quarter.
Corridor benefited from lower incentive accruals of $600000 when compared to both the linked and prior year quarter within the salaries and employee benefits line.
Reflected in this quarter are the annual resets on FICA and unemployment insurance and the annual payment into our HSA accounts, which partially offset.
The lower incentive accruals when compared to the linked quarter.
Paired with the prior year's first quarter the decrease in salary expense incentive.
Salary expenses incentive benefit was offset by merit increases awarded in 2022, our expectation for the full year expense run rate is between 1% to 2%.
Turning to the balance sheet and reviewing movements in the first quarter total loans were down $14 million of that.
Commercial loans decreased less than 1% or $9 million.
Net originations were $56 million during the quarter and that compares with 71 million of net originations in the fourth quarter.
We have seen a slowdown in commercial real estate loans, given the rising rate environment, whereas commercial and industrial volume is strengthen and made up 80% of our net originations.
These C&I originations consisted of lines of credit, which will have future balanced impact. However, they remain unfunded during the quarter and muted any growth in the portfolio.
Our current pipeline remains active and stood at 62 million at quarter end, we expect total commercial loan growth to be approximately 3% in 2023.
Our credit metrics remain sound with a slight decrease in nonperforming loans on a sequential basis and low charge offs in the current quarter.
Total deposits of $1 85 billion increased 78 million or 4% from the fourth quarter.
<unk> deposit increase was seasonal inflows of municipal deposits as well.
While commercial deposits have seen a seasonal outflow, which is typical in the first quarter due to distributions and tax payments that commercial clients make at the beginning of the year.
This smaller outflow in the current quarter was similar in size to last year's first quarter and was offset by growth in consumer deposit balances as we attracted funding into our CD portfolio, which grew $87 million during the quarter.
We will be proactive with pricing and maintain competitive rates in our markets.
That our clients as has happened in previous cycles, we will migrate balances in different products. In particular, we are seeing commercial clients migrate funds out of in demand deposit accounts and into suite products and we expect consumer clients to continue moving funds from savings accounts to Cds. These.
These trends and pricing pressures have an accelerated impact on our margin for the first quarter and if trends continue we expect it will impact margin on a full year basis.
As of now we expect our NIM to experience approximately 35 basis points of compression in the second quarter of 2023 beyond the second quarter is hard to forecast given external macro forces such as potential future fed moves and how competition may play out.
With that operator, we would now like to open the line for questions.
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Thank you. Our first question comes from the line of Alex <unk> with Piper Sandler. Please proceed with your questions.
Hey, good afternoon guys.
Good afternoon Hello.
First wanted to start with just a follow up on that last comment on the NIM John what.
What assumptions are you, making in terms of the the average balance sheet size any meaningful shifts one way or the other.
I think we talked about just the growth in.
Our asset side on the loan side would be about 3% for the full year and correlated deposit.
Growth so both of them probably in step with each other.
The expectation from now until the end of the year.
Okay, but in terms of the just the NIM guide for down three five in the second quarter. The assumption there is relatively flat balance sheet or maybe a little bit of that 3%. We start to see in this in the second quarter.
Yes gradual increase.
Okay.
And then just go into your expense guide I think you said are expecting 1% to 2% expense growth.
For the full year last quarter, you said, 2% to 3% for the full year in 'twenty three and can you talk about some of the things that you've done to to bring that guidance down.
Sure I think.
In particular, we mentioned in the incentive accrual is.
Big piece of that as well as.
We're looking at managing all of our discretionary fund or discretionary spending that we're having this year.
Okay, and then I wanted to ask about insurance revenue the growth of 6% roughly year over year is that a reasonable indicator of when we think about full year insurance expense over 2022 is that 6% is that extra can we extrapolate that.
I think you know.
Each quarter.
If we look year over year should be on an annual basis of 6% and I think that has to do in part to the hardening market as well as some of the growth that we had last year that we're now realizing so a 6% growth would be would be reasonable.
Okay and then just a final question that I have is just only think about seasonal on the adoption and kind of update outlook for.
Turning to a different.
Portfolios and growth et cetera, how should we be thinking about the provision expense do you think now that you are seasonal.
Bank.
Well I.
I mean barring volatility in the economy.
That could take us up or down maybe a little more at a little more quicker pace I think.
Typically what drives us is the growth or any.
Impact from a criticized asset meaning going into non accrual so.
I think a typical provision for each quarter will be consistent.
If it had been historically.
Okay, well when you when you did the seasonal adjustment.
Did you have any sort of quantitative overlays on top of kind of economic forecast. Just you know a lot of people think we're going through recession and other people don't.
I'm, just curious kind of what kind of assumptions went into it.
Yeah, I mean, we have we have are our quantitative piece, which is locked in on the on the forecast that we've identified that are correlated to our our loss projections, but we do have we do have and economic qualitative factor that we have moved in the quarter.
Or do you see what you've suggested is we see a little weakness in the future economy.
Okay, great. Thanks for taking my questions.
Okay.
You are welcome thank you.
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The next question is coming from the line of Chris O'connell with <unk>. Please proceed with your questions.
Hey, good evening.
Okay.
So hoping to follow up on the on the expense commentary.
The full year guide you know modestly improved but just given the.
The starting point of the year.
At lower levels.
You know then than last year.
And in the branch closures, how are you thinking about the cadence going into two <unk> 23.
As a starting point.
So I think.
On the call this quarter.
Is this quarter is.
It is a little higher on the salaries drive most of our our expenses and this was a little higher based on what I suggested with the FICA and the HSA payment.
But I think moving forward, we do have our merit increases that we usually that we typically do it at the end of the first quarter that I'll move that number that will offset some of that benefit that we'll have in second quarter. So.
I think extrapolating.
The full year to each of the quarters is a reasonable estimate.
Okay got it.
And then on the.
Uh huh.
On the NIM guide for down 35 basis points next quarter.
Can you provide us with a little bit of color around.
What what's going into that on either you know the deposit.
Costs, and where those might trend.
Trend towards for the quarter.
Or just the overall I'd be all costs.
Sure.
So I think if we look at our beta through the cycle through the the last month of the quarter. We were at 28. If you look at the if you just take the quarter beta we're closer down to 'twenty. Two so we've taken that 28 kind of extrapolated that through to the first quarter.
Which is not evident in the quarterly results but.
That's where that's what's really driving and that will be impacting the second quarter going through so it was.
It's kind of already pricing that was done through the quarter to the end and we expect that to carry through to second quarter. So we'd say rate migration.
Yep.
And so that 28 that that's the total deposit beta not the interest bearing yes.
Yes.
Okay.
And.
As far as the Securities portfolio goes can you just provide us with what the duration is there and how much of the portfolio is floating rate.
Sure.
All of the whole portfolio. There is we don't have any part variable rate in our in our security portfolio. The duration is just under five years.
Yeah.
Great.
And I know, there's a couple of items that were impacting you know other income.
On a quarter over quarter basis relative to the fourth quarter.
Is this a good run rate.
On a go forward basis or will you guys see a little bit of pick up.
And I think it was that you know higher levels for most of last.
Sure.
Yes, I think we had some items kind of one off items. It seemed throughout the quarters last year. This is a good run rate other than just to remind you that we do have seasonality in our insurance portfolio of third quarter is typically significantly higher.
That that seasonality.
We expect it to be similar so you can apply that seasonality to any expectations for this year's revenue.
Okay got it.
Yeah.
And then on the.
For the tax rate it came in I think a little bit lower than what you guys were thinking previously is it's 24 five so a good number or do you think that'll shake out a little bit lower this year.
I think it'll shake out a little lower.
Just based on.
Our expectation for lower income with the margin.
Yeah.
Okay.
Got it.
And for.
The overall.
Credit quality and you know what you guys are seeing within your markets in the portfolio, obviously this quarter.
It is very strong.
Is there any pockets of risk or you know what are you guys looking most closely at.
You know in terms of what's most attractive at this point in the cycle and you know what you're most excited to put on the balance sheet versus where you might be shying away from.
That's a couple of questions here, Chris Let me, let me start with part of the answer and make sure that I covered down on all yours.
Number one what we're seeing is a migration, which we've tried to do any way from.
Cree or <unk>.
Commercial mortgages to C&I.
We like that that's good.
So we're happy with that migration to put that on the books.
And you talked about credit.
<unk>, so I'll talk about that at the end, but we are seeing obviously on the other loan portfolios Youre also seeing mortgage slow down so on both sides consumer and commercial.
Rates are impacting the projects and slowing.
But as John mentioned, we've seen 80% of our production come out of C&I and the last quarter, which is a good.
A good marker for us we believe as we've we're.
We're balancing the portfolio with a.
Good earning assets there.
With regard to credit we feel good about the quality of credit right now.
You know we talked about the take back of the provision here, but remember part of that was production related in terms of.
Lower levels of production assets in terms of we have less balances. So you didn't need provision there that's part of the step back on that but on top of that we've been talking for a long time about.
The hotel's those got better we do not have a concentration in offices.
Our commercial real estate portfolio has generally been in things like owner occupied and multifamily which are still.
Performing very well so we're feeling good about credit quality in terms of the.
The diversity of the portfolio and in terms of the focus of the things that we are in.
Did I cover.
So the things you want to cover there.
Thanks, Dave.
That's all I had thank you I appreciate you taking my questions.
Okay.
Thanks Brent.
Thank you.
At this time I would like to turn the floor over to management for any further remarks.
Thank you Rob.
We'd like to thank everyone for participating in the teleconference. Today. We certainly appreciate your continued interest and support 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 2023 results and we hope you have a great day. Thank you again.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yes.