Evans Bancorp Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 27, 2023

There are 6 speakers on the call.

Operator

Welcome to the Evans Bancorp First Quarter 2023 Financial Results. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll turn the conference over to Deborah Pawlowski, Investor Relations for Evans Bancorp.

Operator

Ms. Pawlowski, you may now begin.

Speaker 1

Good afternoon, everyone, and thank you very much for joining us today. We appreciate your interest in Evans Bancorp. And Anyways, on the call with me, I have with me here David Nasca, our President and CEO and John Connorton, our Chief financial officer. David and John are going to review the results of the Q1 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 as well as other factors that could cause actual results to differ from what is stated on today's call. These risks You can find those documents on our website or atsec.gov. So with that, let me turn it over to David to begin.

Speaker 1

David?

Speaker 2

Thank you, Deborah. Good afternoon, 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. In light of the recent turmoil in the banking industry and range of negative We believe our team has managed the headwinds well and delivered solid results during the quarter.

Speaker 2

It's important to note that we are a strong community bank that has been operating for more than 100 years in a 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 on financial industry performance, we have continued to drive our strategy forward and focus on initiatives that we can control. Our focus 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 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 and appropriate risk and controls guardrails. We believe these internal changes better align corporate responsibilities with our strategic plan while fostering collaboration and accountability. Highlighting some of the results for the quarter, We delivered $5,800,000 in net income, which was up 22% over last year.

Speaker 2

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. Evans 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 As average deposit balances decreased only 1% in the quarter, and in fact, when looking at spot balances at the end of the period, Total deposits were up 4% from the previous quarter. On the asset side of the balance sheet, Loan production during the Q1 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 Q1 continue to be favorable.

Speaker 2

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 While focused on expense management, we have committed to strategic investments in people and technology to better scale the organization, Drive future efficiencies and improve 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 2 properties in Southern Tier market that were part of our branch rationalization initiative completed toward the end of last year. CECL or current expected credit losses methodology was implemented during the quarter, which John will also cover.

Speaker 2

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?

Speaker 3

Thank you, David, and good afternoon, everyone. For the quarter, we delivered earnings of $5,800,000 or 1 point $0.06 per share per diluted share, which was up 22 percent or $1,100,000 from last year's Q1. The increase reflected higher net interest income and a benefit from change in provision for credit losses, partially offset by lower non interest income. The decrease from the sequential 4th 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 4th quarter as higher interest expense resulted from intense competition pressure on pricing of deposits, which accelerated during This more than offset the 4% increase in interest income, which was driven by growth in our variable rate portfolios following the Federal Reserve's continued increase in rates 50 basis points during the quarter.

Speaker 3

The 5% growth in net interest income since last year's Q1 reflected an 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 We saw a 31 basis point decrease to net interest margin in the Q1 from the Q4 to 3.46%. I will talk to our NIM expectations at the end of my remarks. On January 1, 2023, the company adopted the current expected loss methodology for estimating and accounting for the provision for credit losses, which is commonly known as CECL. The impact of CECL was $2,700,000 addition allow us for credit losses and a $2,000,000 net of tax was booked to capital as a beginning of period adjustment.

Speaker 3

The benefit of $654,000 in the provision for the quarter was due to lower loan balances, qualitative factors related to home price and lower specific reserves on impaired loans. Non interest income was $4,100,000 in the quarter, Down approximately 7% from the prior year's Q1, primarily due to movements in mortgage servicing rights and lower loan fees. Compared with the 2022 Q4, non interest income decreased 8% as the sequential quarter included income from a gain on sale And rents collected from an ORE 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 we mentioned last quarter, 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 levels.

Speaker 3

We did implement changes during the 2022 Q4, which resulted in a reduction in fees of approximately $70,000 to 80 dollars with the deposit service charges line. Total interest non interest expense decreased 3% Or $400,000 from the sequential 4th quarter and was relatively flat with last year's Q1. The quarter benefited from lower incentive accruals of 6 $100,000 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 unemployment insurance and the annual payment into our HSA accounts, which partially offset the lower incentive accruals when compared to the linked quarter. Compared with the prior year's Q1, the decrease in salary expense incentive benefit was offset by merit increases awarded in 22.

Speaker 3

Our expectation for the full year expense run rate is between 1% 2%. Turning to the balance sheet and reviewing movements in the Q1, total loans were down $14,000,000 Of that, commercial loans Decreased less than 1% or $9,000,000 Net originations were $56,000,000 during the quarter and that compares with $71,000,000 of net originations in the Q4. We have seen a slowdown in commercial real estate loans given the rising rate environment, whereas commercial and industrial volume has strengthened And made up 80% of our net originations. These C and I originations consist of lines of credit, which will have future balance impact. However, they remain unfunded during the quarter and muted any growth in the portfolio.

Speaker 3

The current pipeline remains active and stood at 62,000,000 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 non performing loans on a sequential basis and low charge offs in the current quarter. Total deposits of $1,850,000,000 increased $78,000,000 or 4% from the 4th quarter. Reflected in the deposit increase was Seasonal inflows of municipal deposits. While commercial deposits have seen a seasonal outflow, which is typical in the Q1 due to distributions and tax payments that clients make at the beginning of the year.

Speaker 3

This smaller outflow in the current quarter was similar in size to last year's Q1 It was offset by growth in consumer deposit balances as we attracted funding into our CD portfolio, which grew $87,000,000 during the quarter. We will be proactive with pricing and maintain competitive rates in our markets and expect that our clients as has happened in previous cycles will Migrate balances in different products. In particular, we are seeing commercial clients migrate funds out of demand deposit accounts and into suite products And we expect consumer clients to continue moving funds from savings accounts to CDs. These trends and pricing pressures have an accelerated impact on our margin For the Q1 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 Compression in the Q2 of 2023.

Speaker 3

Beyond the Q2, it's hard to forecast given external macro forces such as With that operator, we would now like to open the line for questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. Thank you. And our first question comes from the line of Alex Twerdahl with Piper Sandler. Please proceed with your questions.

Speaker 4

Hey, good afternoon, guys.

Speaker 3

Good afternoon. Hello,

Speaker 4

Alex. First, I wanted to start with, as a follow-up on that last Cheap size, any meaningful shift one way or the other?

Speaker 3

I think we talked about just the growth Then 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. Expectation from now until the end of the year.

Speaker 4

Okay. But in terms of the just the NIM guide for down 3.5% 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 the second quarter?

Speaker 3

Yes. Gradual increase.

Speaker 4

Okay. And then just going to your expense guide, I think you said expecting 1% to 2% expense growth For the full year, last quarter you said 2% to 3% for the full year in 2023. Can you talk about some of the things that you've done To bring that guidance down?

Speaker 3

Sure. I think in particular we mentioned the incentive accrual is A big piece of that, as well as we're looking at managing all of our Discretionary spending that we're having this year.

Speaker 4

Okay. And then, I wanted to ask about insurance revenue, the growth of 6% roughly year over year. Is that a reasonable indicator when we think about full year insurance expense over 2022? Is that 6%? Is that Can we extrapolate that?

Speaker 3

I think 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 reasonable.

Speaker 4

Okay. And then just a final question that I have is just when we think about CECL and the adoption and kind of update outlook for Some of your different portfolios and growth, etcetera, how should we be thinking about the provision expense do you think now that you're a CECL bank?

Speaker 3

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. I think a typical provision for each quarter will be consistent, as it has been historically.

Speaker 4

Okay. When you did the CECL adjustment, did you have any sort of quantitative overlays on top of On the economic forecast, just a lot of people think we're going through recession, other people don't. Just curious kind of what kind of assumptions went into it?

Speaker 3

Yes. I mean, we have our quantitative piece, which is locked in On the forecast that we identified that's correlated to our loss projections, But we do have an economic qualitative factor that we have moved in the quarter due What you've suggested is we see a little weakness in the future economy.

Speaker 4

Okay, great. Thanks for taking my questions.

Speaker 2

You are welcome.

Operator

Thank you. The next question is coming from the line of Chris O'Connell with KBW. Please proceed with your questions.

Speaker 5

Hey, good evening. So I'm going to follow-up on the expense commentary. The full year guide modestly improved, But just given the starting point of the year at lower levels Than last year and the branch closures, how are you thinking about the cadence going into 2Q 2023 as a starting point?

Speaker 3

So I think This quarter is a little higher on the I mean, salaries drive most of our expenses And this is 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 at the end of the first quarter that will move that number that will offset some of that benefit that we'll have in second So I think extrapolating the full year to each of the quarters is a reasonable estimate.

Speaker 5

Okay, got it. And then on the NIM guide for down 35 basis points next Can you provide us with a little bit of color around what's going into that on your the deposit Costs and where those might trend towards for the quarter or just the overall IBL costs?

Speaker 3

Sure. So I think if we look at our beta through the cycle, through 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 22. So We've taken that 28 and kind of extrapolated that through to the Q1, which is not evident in the quarterly results, but That's where that's what's really driving and that will be impacting the Q2 going through. So it's kind of already pricing that was Done through the quarter to the end and we expect that to carry through to Q2.

Speaker 3

So we'd say rate migration?

Speaker 5

Yes. And so that 28, that's the total deposit beta, not the interest bearing?

Speaker 3

Yes.

Speaker 5

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

Speaker 3

floating rate? Sure. All of the whole portfolio there is We don't have any variable rate in our security portfolio. The duration is just under 5 years.

Speaker 5

Great. And I know there is a couple of items in that were impacting Other income on a quarter over quarter basis relative to the 4th quarter. Is this a good run rate on a go forward basis? Or will you guys see a little bit of pickup given I think it was at Higher levels for most of the last year?

Speaker 3

Yes. I think we had some items kind of one off items it Seem 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. 3rd quarter It's typically significantly higher. That seasonality, we expect to be similar. So you can apply That's seasonality to any expectations for this year's revenue.

Speaker 5

Okay, got it. 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 24.5% still a good number? Or do you think that will shake out a little bit lower this year?

Speaker 3

I think it will shake out a little lower, just based on our expectation for lower income, with the margin compression.

Speaker 5

Got it. And for the overall credit quality and What you guys are seeing within your markets in the portfolio, obviously, this quarter was very strong. Is there any pockets of risk or what are you guys looking most closely at in terms of What's most attractive at this point in the cycle? And what you're most excited to put on the balance sheet versus where you might be shying away from?

Speaker 2

That's a couple of questions there, Chris. Let me start with part of the answer and make sure that I cover down on all yours. Number 1, what we're seeing is a migration, which we've tried to do anyway from CRE or commercial mortgages to C and I, we like that. That's good. So we're happy with that migration to put that on the books.

Speaker 2

And you talked about credit performance. I'll talk about that at the end. But We are seeing obviously on the other loan portfolios, you're also seeing mortgage slowdown. So on both sides, consumer and commercial Rates are impacting the projects and slowing. But as John mentioned, we've seen 80% Our production come out of C and I in the last quarter, which is a good marker For us, we believe as we've we're balancing the portfolio with good earning assets there.

Speaker 2

With regard to credit, we feel good about the quality of credit right now. 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 hotels, those got better. We do not have a concentration in offices.

Speaker 2

Our commercial real estate portfolio has Generally been in things like owner occupied multifamily, which are still performing very well. So we're feeling good about Credit quality in terms of the diversity of the portfolio and in terms of the focus of the things that we are in. Did I cover the things you want to cover there?

Speaker 5

Yes. Thanks, Dave. That's all I had. Thank you. I appreciate you taking my questions.

Speaker 3

Okay. Thanks. Thanks,

Speaker 1

Chris. Thank you.

Operator

At this time, I'd like to turn the floor over to management for any further remarks.

Speaker 2

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 Q2 2023 results and we hope you have a great day.

Speaker 2

Thank you again.

Operator

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Evans Bancorp Q1 2023
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