Q2 2023 Evans Bancorp Inc Earnings Call
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Okay.
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Greetings and welcome to your bonds Bancorp's second quarter of fiscal year 2023 financial results conference call. 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. Please press star zero on your telephone keypad. As a reminder, this conference is being the Congress. It is now my pleasure to introduce your host Craig Mihalik Investor Relations. He wants Bancorp. Thank you Mr. Martin you may begin.
Yeah. Good afternoon, everyone. We certainly appreciate you 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 <unk>, Our Chief Financial Officer.
David and John are going to review the results for the second quarter 2023, and provide an update on the company's strategic progress and outlook. After that we'll open up the call for questions should.
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 and have been back 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 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.
The 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 an F. B C. Dot Gov. So with that let me turn it over to David to begin David.
Yeah.
Thank you Craig Good afternoon, everyone. We appreciate your joining us today.
I'll start with a review of the key themes that played out during the quarter and well then hand, it off to John to discuss our results in detail.
You have somewhat settled in the banking sector. This quarter as the focus has returned from peers of bank failures to execution. However, external market forces in particular, the interest rate environment continued to have an effect on our results while loan yields have improved both sequentially and year over year, the increases are being outpaced by deposit.
Cost is reflected in net interest margin contraction.
We expect these market conditions and pricing pressures to persist and negatively impact our margin at a decreasing rate in the third quarter as John will discuss in more detail.
Addressing these headwinds we are focusing our efforts on areas that are important for short term stability and to deliver us in a position of strength when the cycle turns in these conditions change. This includes maintaining and growing deposits prudent asset growth expense management and maintaining our credit standards and.
Strengthening capital.
The shared tool for all these objectives remains on laser focus on client engagement and providing broad solutions through continued collaborative communication by our associates.
Our deposit base is solid and stable and remains backed by a diversified product portfolio, which is a focus of our efforts to grow it.
Long with deposits, we have a robust availability of alternative funding sources.
Second quarter and year to date performance has reflected balanced fluctuations that are mostly seasonal.
Predominantly includes normal municipal flows overall, we believe we are executing well against stiff competition as our team has continued to retain key deposits, while accumulating net new customers and accounts.
Staying close to our clients and cultivating prospective relationships remains paramount as we look for opportunities to drive growth and loan production while growth has been somewhat muted this quarter and for the year. We continue to focus on building a diverse portfolio of high quality loans and have a robust pipeline, which stood at $87 million.
Quarter end.
Credit trends in the second quarter continued to be favorable and while we have historically experienced higher nonperforming assets than our peers due to relative size and commercial focus we have and expect to successfully manage these credits and as a result continue to see low actual charge offs <unk>.
<unk> and technology and talent is also critical as we look to scale the organization enhance client experience and more effectively manage risk while creating opportunities for efficiencies.
We have completed phase one of the multiyear commercial efficiency and customer experience initiatives embarked upon late last year with integrated loan applications streamlined more efficient loan origination workflows and consistent product handling.
Other highlights from the quarter included changes to our board.
In may as part of our annual meeting of shareholders activities longtime director James EBITDA Junior retired and we added two new highly experienced and accomplished leaders Dhanda Perrier, who brings vast knowledge and experience in information technology, Cyber security finance strategy and Digitization.
And Robert James a corporate attorney, who has expertise in government and corporate governance diversity equity and inclusion.
Additionally, during the quarter. The company was re added to the Russell 2000 index as part of its annual reconstitution. We believe this can provide additional demand and liquidity to our stock trading.
Lastly on the community front, the bank made a $1 million investment with launch in New York and nonprofit venture development organization and C. D. F I, providing high growth potential start ups with members Mentorship and access to seed funding with a goal to fuel the startup ecosystem in Western New York.
<unk>.
This is a second round of investing the bank has participated in with this organization.
As we look to the second half of the year, we expect to continue to confront headwinds, but we will maintain focus on those areas that support short term progress and sustainability of our business model.
And position us strongly coming through this unusual business climate for their successful execution of our long term strategic goals.
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 $4 9 million or <unk> 90 per diluted share, which was down from last year's second quarter largely due to reduced net interest income, helping offset this reduction were lower expenses and a benefit from the change in provision for credit losses.
The decrease in earnings from the sequential first quarter also reflected a reduction in net interest income as well as a smaller release of allowance for credit losses, partially offset by higher noninterest income and lower noninterest expense.
Net interest income was impacted over both comparable periods by higher interest expense given intense competitive pressure on deposit pricing, which began to accelerate last quarter. This more than offset increases in interest income, which was driven by growth in our variable rate portfolio is following the federal reserve's series of rate increases.
With increased interest expense from higher deposit costs, we saw 36 basis point decrease to net interest margin in the quarter to $3. One zero percent I'll talk to our NIM expectations at the end of my remarks.
The benefit of 116000 in provision for credit losses during the quarter was largely due to lower criticized loan balances and lower specific reserves on impaired loans, partially offset by loan growth.
Noninterest income was $4 7 million in the quarter up approximately 2% over last year's second quarter and up 14% sequentially.
<unk>, which is the largest contributor within this category was up 6% year over year and 12% from the linked quarter. The increase from the first quarter of 2023 reflects seasonal higher policy renewals for institutional clients, while the year over year increase was due to commissions from new commercial lines insurance sales and higher premiums.
As mentioned previously the competitive landscape in regulatory environment have brought to the forefront changes to overdraft fees in terms of how they are handled and assess and at what level.
We did implement changes at the end of last year, which resulted in a reduction in fees within the deposit service charges line when compared with last year.
The other income line increased 300000 from the sequential first quarter, primarily due to movements in mortgage servicing rights and higher loan fees.
Total noninterest expense decreased 2% from the sequential first quarter and was down 4% from last year's second quarter. The.
The driver of this improvement was largely within the salaries and employee benefit line, which was down 8% over both comparative periods.
Reflected in the linked first quarter was the annual reset on FICA and unemployment insurance and the annual payment into our HSA accounts.
When compared with last year's second quarter. The decrease was primarily due to lower incentive accruals of $1 2 million, partially offset by merit increases and strategic hires our expectation for the full year expense run rate is a decrease of 1%.
Turning to the balance sheet and reviewing reviewing movements in the second quarter total loans were up approximately $12 million.
Of that commercial loans increased 1% or $11 million.
Net originations were $54 million during the quarter compared with $56 million of net originations in the first quarter, we've seen a slowdown in commercial real estate loans, given the rising rate environment. Your C&I originations remain unfunded today muting growth in the portfolio.
Current pipeline remains active and stands at $87 million at the quarter and we expect total commercial loan growth to be approximately 3% in 2023.
Our credit metrics remains sound. Despite the right the rise in nonperforming loans, which reflects just a single commercial credit of $6 5 million that is still accruing and we expect that loan to come current in the third quarter.
Criticized loans decreased during the quarter by $19 million from $93 million at March $31 million to $74 million as of the end of second quarter.
Total deposits of $1 79 billion decreased $63 million or 3% from the first quarter $48 million of which consisted of typical seasonal municipal outflows and.
An additional 11 million transfer to our securities under agreement to repurchase account, which provides collateralization for those deposits, but is not classified as a deposit.
It is however, still a customer count and a source of funding.
Overall, our core deposit levels have been solid given external market forces current headwinds at.
At June 30, the percentage of uninsured and uncollateralized deposits was steady at 19%.
Average total deposit balances were stable at 182 billion during the quarter when compared to the linked first quarter. However, as has occurred in previous cycles balances have and are expected to continue to migrate into different products. Specifically, we are seeing commercial clients migrate funds from demand deposit accounts into sweep accounts and we expect consumer.
Clients to continue moving funds from saving accounts Cds.
As mentioned earlier these trends and pricing pressures have an accelerated impact on our margin for the second quarter and are expected to impact the margin on a full year basis.
As with many banks, we will continue to fight for deposits by being proactive with pricing and maintaining competitive rates in our market.
Currently we expect our NIM to experience approximately 20 basis points of compression in the third quarter of 2023 beyond the third quarter is difficult to forecast given the external macro forces such as potential future fed rate moves and how competition may play out, but our current expectation is that NIM pressure could moderate towards the end of the year.
With that operator, we would now like to open the line for questions.
Thank you.
We will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue.
I start to if you would like to remove your questions from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
Okay.
First question comes from the line of Nick <unk>.
The Tao group. Please go ahead.
Good afternoon, everyone. How are you today.
Good Nick how are you im doing well.
Good good eye on the loan growth side I heard your commentary for 3% commercial growth in 2023 can you help us think about your full year expectation for the overall portfolio.
Yeah.
For the overall.
Can you just clarify a little bit and make you mean, just the total growth or yes, yes, exactly just including the residential and David the residential corner and as well our residential.
Portfolio, probably we're not going to see much lift from that most of the growth will be in our commercial portfolio and that will be.
The 3% growth that we're seeing from here to the end of the end of the year.
Okay great.
And then just just a follow up on the expense guide you know clearly a great job controlling costs, so far in finding efficiencies I'm.
Just to get to that minus one.
1%.
Right by the end of the year is it kind of assumes a sizable pickup in the back half of the year or is that pretty ratable across the last two quarters or is there a pick up in the third quarter.
It gets you there.
I'd say both.
Both quarters would be equally sized from the.
From the total gross expense.
That's very helpful. And then just on the on the loan pricing side can you just help us think about what what rates youre getting on your core commercial real estate product.
Yeah, So where we are.
We're probably getting high sixes anywhere from six five to seven.
Depending obviously on term and maturity.
But that's probably where it's falling and so that's anywhere between two and a quarter and $2 50 off of our current over our current funding source.
Wonderful thank you for taking my questions.
Thanks, Nick.
Thank you next question comes from the line of Alex <unk>.
With Piper Sandler. Please go ahead.
Hey, good afternoon.
Good afternoon, Alex Hello, Alex.
Alright.
Wanted to ask about a loan.
The asset sensitivity and kind of what kind of lifts.
<unk> still be to come on the loan portfolio I seem to remember you guys had a pretty good chunk of variable rate.
Loans out there I'm just curious if.
They've reached ceilings or if we still expect some some lifts in that portfolio.
It continues to progress.
Yes, there is.
About $320 million in variable and there are we haven't reached any feelings on though so we would expect I mean, there are some resets across the months, but.
Im going 30 days or 60 days from from a change in prime but.
Just looking at a full year you would we expect a 25 basis. If it's a 25 basis point lift we'd get that on the 300 300 and something million dollars.
Okay.
I guess sort of bigger picture when you think about asset sensitivity and as you know we may be later this year transition from a rising rate environment to a potential lower rate environment. How would you say your position. These days I mean, it seems like the cost of deposits is obviously moving higher pretty pretty quickly, but would you say that you've kind of moved from an acid sensor.
To be positioned to a liability sensitive position or.
How are you how are the models coming out.
Yes.
Say that we have moved.
From an asset sensitivity to a liability sensitivity I think in a down 200 will come out in our Q.
But it's not it's not significantly material from <unk>.
Less than 5%.
On a down 200.
Yeah.
Okay.
And I guess as you think about obviously managing through a pretty tough rate environment and revenue environment and I think you alluded to sort of phase one of the expense initiatives being now completed you know is it is it time to be looking at phase two and sort of what kinds of things could that include.
Well I think we're I think we're constantly looking for efficiencies I do think David we went through we're still through the project.
Yeah, a little elevated on our expenses because we're incurring some expenses when we when we're putting the project in.
The cost efficiencies will be at the end of this year and into 2024.
Okay.
It's where I mean, if the expense level ticks back up above 15, 15, one or so in the third and fourth quarter as you mentioned earlier.
In your response to the last questions.
You know where do you where do you see expenses, starting I guess, starting the year with those efficiencies in place starting 2024.
Well I think I think we expect the efficiencies as John said, we're going to run at kind of this level here till the end of the year, we expect that some of the.
Efficiencies coming out of the commercial project will play into next year. So.
You know there's.
Some some positions that will be.
Through there, but I mean I.
Do you want to yeah.
Alex I would say that our the efficiency that we're going to get in 2024 are going to offset some of the increases that we typically have merit and stuff. So I would say it kind of a flat at least for the first quarter of next year is kind of what would our expectation is and we still have a lot to look at for looking through and budgeting out the remainder of 2024.
Sure.
I think there is also an ongoing requirement.
Looking forward as we've tried to digitize more to get some of these.
Efficiencies that there will be some investment in there that will balance those saves off too because we're going to reinvest and continuing to migrate towards some digitization that will help us at least be competitive with some of these bigger people.
That are spending a lot more than we're spending on it.
Okay.
Great. Thanks for taking my questions.
Youre welcome.
Thank you.
A reminder to all the participants that you've met the star one to ask a question.
Next question comes from the line of Chris O'connell.
<unk>. Please go ahead.
Hi, yes, good afternoon.
Okay great.
<unk> talked about.
I think $1 million investment.
Charitable investment in the quarter.
I think it came through in other expenses.
Does that all come through this quarter in other expenses or was that spread out over the course of the expense base.
Yes, Chris I am sorry, yes, there wasn't a direct expense investment it was actually an investment that we hold on our balance sheet.
So that that actually earn a return.
So.
We've only made I think in this quarter, we had about a $50000.
Charitable contribution was the limit of our total contributions for this particular quarter, yeah, that's not a charitable investment Chris that is a community investment, but it does have a return to it.
You mentioned, it's a <unk> it's also <unk>.
Seed capital for venture startups, and they are throwing off a return on the fund.
Okay got it got it.
And you guys talked about.
Yes.
Non interest bearing deposit mix shift and perhaps some continued pressure.
Into the back half of the year.
And I know that there is some seasonal muni flows as well.
Can you just talk through what you're seeing how much mix shift might be remaining and where things kind of settle out from here and just overall.
Municipal kind of seasonal impact into the back half of the year.
Yeah, So I think the heart.
Our balances I'll talk municipal flow first so our balances are probably high at the end of the end of the first quarter and then again at the end of third at the beginning of fourth quarter.
And those flows that you saw so decrease of 63 and I think we had.
Similar increase in first quarter, that's kind of the high and the low points there.
So high at the end of March and then then low in June and then high again.
Hi, again into the third quarter, and then low by the end of the year. So that's kind of how that ebbs and flows is it material, obviously, but it's pretty predictable.
As far as.
As far as movement from from transactional accounts or savings account.
I think thats all reflected in our expectation of the margin the 20 basis points, that's kind of our.
You know that.
That's reflecting the movement there.
And then we have.
<unk> seen some some slowdown of that.
And a lot of that margin compression, we've seen through June and some moderation of that and Thats why were for the fourth quarter and the rest of the year.
We're hopeful that we're going to see some of that 20 basis points could be stabilization point.
Okay great.
<unk>.
And do you guys have any updated deposit beta expectations.
For this full tightening cycle.
Yes, I think we were looking for a little more data through the third quarter really too.
Kind of predict.
To see that exactly what your question was as far as movement out of transactional accounts into the interest bearing accounts.
I think we're still seeing some some volatility there and we really haven't to predict where that's going we don't have the data at this point.
Okay got it.
Yes.
Yes.
Got it I think you mentioned in your prepared comments that we expect the one non accrual that was moved over this quarter to become current in <unk> just any any color you can provide around that relationship.
It's not a non accrual, it's 90 days and still accruing Chris though.
It has.
It's a it's a senior.
<unk> centre that it had some funding issues through the state and our expectations as delay that will that will come around and third quarter.
So we haven't classified it as a non accrual at this point based on our expectation of it.
Alright.
Okay got it.
And as far as just the overall credit outlook, obviously not too much movement here in net charge offs have.
They've been great. So far I mean, how are you thinking about the reserve levels going forward.
And.
If you could remind us on.
Some of the reserve levels related to kind of the hotel portfolio.
Are you seeing.
How that might progress into the back half of the year.
Yes, I think our I think our hotel portfolio.
Now we currently it's a small amount that that's kind of in our criticized.
And our portfolio I would say in general we've seen this quarter, we've seen our criticized assets, which really is one of our more solid metrics as to where our credit is trending and we again as I mentioned earlier, we saw a $19 million reduction in that most of that was in our C&I portfolio and operating portfolio, our operating company portfolio.
Yeah.
But our hotels, we do we have one in nonperforming that's pretty big 7 million and then a couple of other that are still just criticize we see progress in each of those.
And that's where if we do have additional reduction and benefit that's where we'll see it now under C. So a lot of our.
A lot of our.
Amount that are driven by the where the economy is and so as the economy goes the season will go so predicting that.
At least as long as things stay stable, we see we see our provision kind of thing.
It'll be represented by the growth that we have in the in the portfolio.
Okay great.
<unk>.
And on the.
On the fee side insurance fees are strong.
A lot of its seasonal but also year over year.
I mean is that.
Strength.
<unk> continue into the back half of the year.
Yes, we do I mean, a lot of that strength is really in the industry.
Use of the term hardening of the market I think insurance companies have brought up their premiums and we're benefiting on our commissions due to that so there is just a general increase in our commission based on the amount of premium that our customers are paying because of that.
Because of the the increase in the industry.
Okay great.
And is that are there are other income lines done.
Yes.
MSR.
And this quarter is that straight back down to <unk> levels or more similar to what was seen in <unk>.
2022.
Or is loan there is loan fees in there too. So they are the two of them together it does pop around a little bit just base based on volatility in interest rate markets.
And it's hard to be predictable on that.
Got it.
At this time, thanks for taking my questions.
Hey, Chris.
Thank you there are no further questions at this time I would like to turn the floor back over to David Nasca for closing comments.
Thank you I'd like to thank everybody for participating in our teleconference. Today. We certainly appreciate your continued interest and support and we ask that.
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 third quarter 2023 results. We hope you have a great day. Thank you very much.
Thank you.
Includes todays teleconference. You may disconnect your lines at this time, thank you for your participation.
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