Evans Bancorp Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to Evans Bancorp Third Quarter Fiscal Year 2023 Financial Results. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Deborah Pawlowski, Investor Relations for Evans Bancorp.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Doug, and good afternoon, everyone. We appreciate you taking the time today to join us as well as your interest in Evans Bancorp. On the call, I have with me Dave Nasca, our President and CEO and John Connerton, our Chief Financial Officer. David and John are going to review the results for the Q3 of 2023 and provide an update on the company's strategic progress and outlook. After that, we will open the call for questions.

Speaker 1

You should have a copy of the financial results that were released today after markets closed. If not, you can access them on our website at www.evansbank.com. As you are aware, we may make some forward looking statements during the formal discussion as well as during the Q and A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.

Speaker 1

Please find those documents on our website or atsec.gov. With that, let me turn it over to David to begin. Dave?

Speaker 2

Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us today. I will start with a review of the key themes that played out during the quarter and we'll then hand it off to John to discuss our results in detail. 3rd quarter results were mixed, but positive Overall, from a growth and operating performance standpoint, positioning the company solidly in a difficult business environment.

Speaker 2

Industry headwinds related to the cost of deposits drove further compression in the Denditures margin, which was anticipated. Our margin was further impacted by the reversal of interest income on 1 large long time credit client That has experienced government reimbursement challenges. Despite this unique circumstance, as we review and analyze credit, We see strength and resilience in our portfolio. Credit trends remain favorable and actual charge offs continue to be low. Absent the reversal of net income, our margin was in line with projections.

Speaker 2

We expect market conditions and pricing pressures to generally persist, but are seeing signs of moderation in deposit cost increases as we round out this year. Don will provide more detail on our NIM Expectations during his report. Our deposit base and liquidity continue to be solid and stable, backed by a diversified product portfolio. In addition, our associates have performed well in lending and business development given today's market dynamics and are making inroads with new clients and cementing existing relationships as evidenced by our 8% annualized loan growth in the quarter. We are taking corrective measures to control costs and expenditures by focusing on operating efficiency and providing exceptional experience to our valued clients.

Speaker 2

Overall, we continue to block and tackle on our core business as we grind out results within our risk and return parameters In an inhospitable banking environment. With that, I will turn it over to John to run through our results in greater detail

Speaker 3

Thank you, David, and good afternoon, everyone. For the quarter, we delivered earnings $3,600,000 or $0.60 per diluted share, which was down from last year's Q3, largely due to reduced net interest income. Helping offset this reduction was increased insurance service and fee revenue, while overall expenses decreased. The reduction in earnings The sequential second quarter also reflected a lower net interest income and an increase in provision for credit losses, partially offset by seasonally higher non interest income. Net interest income was impacted over both comparable periods by higher interest expense given intense competitive pressure on deposit pricing, which began to accelerate at the This more than offset increases in interest income driven by growth in our variable rate portfolios following the Federal Reserve series of rate increases.

Speaker 3

With increased interest expense from higher deposit costs, we saw a 31 basis point decrease in net interest margin in the quarter to 2.79%. As David indicated, impacting net interest margin by 8 basis points was the reversal of approximately $400,000 of interest income, primarily resulting from 1 large commercial loan that was put on non accrual status during the quarter. I will talk to our NIM expectations at the end of my remarks. The increase of $506,000 in provision for credit losses was predominantly due to loan portfolio growth. Non interest income was $5,600,000 down approximately 4% over last year's Q2 and up 15% sequentially.

Speaker 3

Insurance, which is the largest contributor within this category, was up 3% year over year and 22% from the linked quarter. The increase from the Q2 of 2023 reflects seasonally 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, Competitive landscape and regulatory environment have brought to the forefront changes to overdraft fees in terms of how they are handled and assessed 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. Other income decreased $300,000 from last year's Q3, primarily due to a $200,000 final payment Received in connection with an historic credit investment during the Q3 of 2022.

Speaker 3

Total non interest increased 2% from the sequential second quarter and was down 10% from last year's 2nd quarter. The driver of this change was largely within the salaries and employees benefits line, which is Flat quarter over quarter and down 20% from the previous year. When compared with last year's Q2, the decrease was primarily due to lower incentive accruals of $1,300,000 and reduced staff expenses through consolidation of branches and back office operations. Our expectation for full year expense run rate is a decrease of 3%. Turning to the balance sheet and reviewing movements in the 3rd quarter, Total loans were up approximately $34,000,000 Of that, commercial loans increased 3% or $31,000,000 Net commercial originations were $62,000,000 during the quarter compared with $54,000,000 of net originations in the 2nd quarter.

Speaker 3

We are being selective in our underwriting decisions, but are seeing opportunities in commercial real estate, including multifamily and warehousing facilities that are meeting our credit parameters. The C and I funding rates remain muted and continue to impact growth in that portfolio. The current pipeline remains active and stands at 67,000,000 At quarter end, we expect total commercial loan growth to be approximately 3% in 2023. Credit metrics remain sound with a 2% decrease in non performing loans. Credit side loans increased slightly by $2,000,000 from $74,000,000 at June 30 76,000,000 as of the end of the third quarter.

Speaker 3

This is an $11,000,000 decrease from last year's Q3 from 89,000,000 Total deposits of $1,810,000,000 increased $18,000,000 or 1% from the 2nd quarter. At September 30, the percent of uninsured and un collateralized deposits was steady at 18%. Average total deposits decreased slightly to $1,790,000,000 during the quarter when compared to $1,820,000,000 in the 2nd 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 savings accounts to CDs.

Speaker 3

As mentioned earlier, these trends and pricing pressures have an accelerated impact on our margin for the Q3 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 markets. Deposit rates have continued to increase because of strong competition in the time deposit marketplace. And as I commented above, have caused the continued shift of Customer funds from non interest bearing to interest bearing accounts. Chances of a late 2023 decrease in Fed funds rate Have been replaced by expectations that interest rates will stay higher longer and this has affected customer and competitive behavior.

Speaker 3

Currently, we expect our NIM to experience approximately between 15 20 basis points of compression in the Q4 of 2023. Beyond the Q4, it's difficult to forecast given 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 toward the beginning of next year. With that, operator, we would now like to open the line for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer Our first question comes from the line of Nick Kucharavi with Hovde Group. Please proceed with your question.

Speaker 4

Good afternoon, everyone. How are you?

Speaker 2

Good, Nick. How are you?

Speaker 3

Hello, Nick.

Speaker 4

Good. Good. Thanks. So just to clarify that the NIM guidance, John, are you suggesting 15 to 20 basis points of compression From the reported level of $279,000,000 or the adjusted level of $287,000,000 which excludes the interest reversal?

Speaker 3

The $287,000,000 adjusted, Nick. Thank you.

Speaker 4

No. Thank you. And then a nice acceleration of loan growth relative to the prior quarter. You mentioned strong growth in commercial real estate. Are you seeing any sort of pullback from the competition just given the funding challenges in the industry?

Speaker 2

We are. We're seeing a bit of a pullback in certain quarters. Some people grew quickly and have stepped out. Others are taking There are pre balances and selling them into the secondary market to get them off their balance sheet. So we are seeing some pullback, But we're also seeing projects slow a little bit as well.

Speaker 2

We've been doing pretty well to capture our share, but it's been The higher rates have been a little bit frosty in terms of some of these projects, in terms of their pace.

Speaker 4

That's very helpful. You've done a great job of controlling expenses this year. As we start thinking about 2020 Are there any particular investments to be made that may cause an outsized impact next year?

Speaker 3

No, Nick. I think the run rate that we have projected for next year is low single digits That would just take more of the typical inflationary and increases that we typically see in any particular year. Most of our investments have been made previously and we're not expecting any large changes to that.

Speaker 4

Excellent. And then maybe just one final one on the tax rate. It was just a little higher this quarter relative to prior periods. Any sense of where that shakes out going forward?

Speaker 3

Yes, at 23% for the full year and that should be typical.

Speaker 4

Thank you for taking my questions.

Speaker 2

Yes. Nick, one thing I also wanted to say, just because it's being recorded, John, when he was talking earlier, he talked about and it's in our The press release, he talked about earnings of $3,600,000 and he stated that we had $0.60 per diluted share. It's actually 0.66 cents per diluted share. So I just want to get that on the recording, but it is in our press release. So

Speaker 4

Thank you.

Speaker 3

Yes.

Operator

Our next question comes from the line of Alex Twerdahl with Piper Sandler. Please proceed with your question.

Speaker 5

Hey, good afternoon.

Speaker 2

Good afternoon, Alex. How are you?

Speaker 5

I'm well. Thanks. I wanted to spend a little bit of time chatting about the NIM here. It looks like loan yields increased by about 10 basis points this quarter and last quarter. As you kind of look out and sort of maybe talk a little bit about new origination yields and sort of what kind of Pricing you're getting and is 10 basis points of higher per quarter kind of what you're thinking John in your guidance for the NIM and your outlook for the NIM?

Speaker 3

So, off the top of my head, I haven't recalculated that. If that's a quick calculation off of our reports that do include the Adjustment for that $400,000 Alex, I would say it's slightly higher than that. And I know we've talked about this in the past. We have around $300,000,000 come back to us a year in principal and renewals, Securities pay down, pay off and the like. So that's kind of the repricing Portfolio that comes back to us that is kind of driving our expectation on the loan side.

Speaker 3

But I guess the short answer would be that our expectation for this quarter's increase in yields would be a good expectation for the Continued expectation for next year adjusted for that $400,000

Speaker 5

Yes, my calculation was adjusted for the $400,000 on the nose. So I guess, I think you said some moderation potentially expected early in 2024. I mean, when I guess, when and where do you think the NIM could wind up bottoming?

Speaker 3

Well, I mean, it's as I suggested in my comments, it's going to depend on competitive pressure. We did see a kind of competitive pressure moderate to some degree at the end of second quarter, beginning of the Q3. But Based on the environment that we were in, and the long end pulling up, and the response that the competition did, That was not expected. So we had a little bit more compression than we thought. We expected 20 basis points.

Speaker 3

We came in around 23. And the beginning of 4th quarter here is again probably unexpected, But we would still stick with that moderation in the late Q2, Q1 of next year Based on current run rates and the current environment that we're in.

Speaker 5

Okay. Have you guys been considering doing Any restructuring in the securities portfolio or adding on any swaps? We've seen some of your competitors do that kind of stuff recently That's been received well by the market. I'm just curious if you have any appetite for some products that could potentially Help that NIM reverse sooner?

Speaker 3

So we're always looking at our balance sheet and the asset liability management of that And we're open to we're continually looking at it. We're also balancing any type of capital levels that we have And putting those things all together, so yes, the answer is yes, we're always looking at those things, nothing planned immediately.

Speaker 5

Got it. And then can you just go through the credit metrics again? And it seems like you guys reverse some non interest income Some interest income as a result of a credit deteriorating what that was. Didn't look like it hit the NPL number, the charge off number. So Just help us figure out exactly what's going on underneath the surface?

Speaker 3

Sure. So that talked about that last quarter, Alex. That was one of our credits that had gone. It was in nonperforming, but it was 90 days and still accruing. It was as David's comments suggested, they're dependent on government rate reimbursement.

Speaker 3

Typically, those can go long. This is John unexpectedly long. We still think that that credit is secured well and it's going to come back around. It's just it was too long from a time perspective. So we did put it into non accrual and we had to unwind that accrued interest that was sitting in our receivable But it was already adjusted for in our non performing because it was 90 plus at the end of last quarter.

Speaker 3

So you wouldn't have seen any And it's well secured, so we haven't really needed to reserve anymore and we haven't charged anything off.

Operator

Okay.

Speaker 3

If that makes sense to you.

Speaker 5

Yes, that is helpful. I think that's all I have for right now. Thanks for taking my questions.

Speaker 2

You're more than welcome.

Operator

Our next question comes from the line of Chris O'Connell with KBW. Please proceed with your question.

Speaker 6

Hey, good afternoon.

Speaker 3

Hi.

Speaker 6

So just following up on the NIM commentary, you mentioned a little bit more pressure At the start of the Q4, did you guys have what the spot margin was for September?

Speaker 3

I don't know that off the top of my head, Chris. I apologize.

Speaker 6

Okay. And then, in terms of the restructuring and That question regarding NIM improvement and things of that nature, you've seen A few peer insurance sale transactions and joint restructurings in the market for the past quarter or 2. Is that something that You have considered it all. And just any color around your thoughts there?

Speaker 2

I think the answer that John was talking about Asset liability, we're considering all options to create value for the shareholders. We're looking at all long term options strategically. So that's sort of the answer. We look at everything.

Speaker 6

Got it. Any chance you could just expand on if you guys have taken a look at that, how you guys weigh the pros and cons You know exact type of transaction?

Speaker 2

Well, on any transaction that we look at, we look at The long term return to shareholders and what happens to capital, how we redeploy all those things. It is a full business case for any opportunities we look at, but we look at everything.

Speaker 6

Great. And I apologize if I missed it earlier, but I know you guys gave the loan pipeline at $67,000,000 Any thoughts on just overall Net loan growth going forward and what the oncoming yields are?

Speaker 2

Well, I think What we're looking at is we think the run rate that we talked about was sort of low single digits, the 2% to 3% level. The oncoming rates that we're looking at is generally we're getting our general Yield spread is 2.50 over the comparable term. We're getting a little more in some cases right now. We're able to get that because it's a more challenging environment. We're making sure we're being paid for the risk.

Speaker 2

But You're seeing we're generally holding our spreads a little plus.

Speaker 3

So just the yields are typically, Chris, are somewhere 7.5% and above.

Speaker 6

Great. All right. That's all I have for now. Thanks for taking my questions.

Speaker 2

Thank you.

Speaker 3

Thanks, Chris.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 2

Thank you. Real quickly, I'd like to thank everybody for Please feel free to reach out to us at any time. And we look forward to talking with all of you again when we report our Q4 results for 2023. We hope you have a great day. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You You may disconnect your lines at this time and have a wonderful day.

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Earnings Conference Call
Evans Bancorp Q3 2023
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