Evans Bancorp Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

And welcome to EVANS Bancorp's Second Quarter 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations, Evanes Bancorp.

Operator

Thank you. Mr. Mychajluk, you may begin.

Speaker 1

Yes. 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 Connorton, our Chief Financial Officer. David and John are going to review the results for the Q2 of 2023 and provide an update on the company's strategic progress and outlook.

Speaker 1

After that, we'll open up the call for questions. 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 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.

Speaker 1

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

Speaker 2

Thank you, Craig. Good afternoon, everyone. We appreciate you joining us today. I'll 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. Things have somewhat settled in the banking sector this quarter as the focus has returned from fears of bank failures to execution.

Speaker 2

However, external market forces, in particular, the interest rate environment continue 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 costs as 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 3rd 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 and these conditions change. This includes maintaining and growing deposits, prudent asset growth, expense management, maintaining our credit standards and strengthening capital.

Speaker 2

The shared tool for all these objectives remains a 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. Along with deposits, we have a robust availability of alternative funding sources. 2nd quarter and year to date performance has reflected balance fluctuations that are mostly seasonal, which predominantly includes normal 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 in loan production.

Speaker 2

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 $87,000,000 at quarterend. Credit trends in the Q2 continue to be favorable. And while we have historically experienced higher non performing 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 Investing in 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 1 of the multi year commercial efficiency and customer experience initiative 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.

Speaker 2

In May, as part of our Annual Meeting of Shareholders' Activities, longtime Director, James E. Biddle Jr. Retired and we added 2 new Highly experienced and accomplished leaders, Don de Perrier, who brings vast knowledge and experience in information technology, Cybersecurity, Finance Strategy and Digitization and Robert James, our Corporate Attorney, who has expertise in corporate governance, Diversity, Equity and Inclusion. Additionally, during the quarter, the company was re added to the Russell 2,000 Index as part of its annual reconstitution. We believe this can provide additional demand and liquidity to our stock trading.

Speaker 2

Lastly, on the community front, the bank made a $1,000,000 investment with Launch New York, a non profit venture Development organization and CDFI providing high growth potential startups with mentorship and access to seed funding with a goal to fuel the startup ecosystem in Western New York. This is the 2nd 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'll maintain focus on those areas that support short term progress 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.

Speaker 3

John? Thank you, David, and good afternoon, everyone. For the quarter, we delivered earnings of $4,900,000 or 0 $0.90 per diluted share, which was down from last year's 2nd 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 Q1 also reflected a reduction in net interest income as well as the smaller release of allowance for credit losses, partially offset by higher non interest income and lower non interest expense.

Speaker 3

Net interest income was impacted over both comparable periods by higher 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 portfolios following the Federal Reserve series of rate increases. With increased interest expense from higher deposit costs, we saw a 36 basis decrease to net interest margin in the quarter to 3.10%. I will talk to our NIM expectations at the end of my remarks. The benefit of $116,000 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.

Speaker 3

Non interest income was $4,700,000 in up approximately 2% over last year's Q2 and up 14% sequentially. Insurance, which is the largest contributor within this category, was up 6% year over year and 12% from the linked quarter. The increase from the Q1 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 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 the reduction in fees within the deposit service charges line when compared with last year.

Speaker 3

The other income line increased $300,000 from the sequential Q1 primarily due to movements in mortgage servicing rights and higher loan fees. Total non interest expense decreased 2% from the sequential Q1 and was down 4% from last year's Q2. The driver of this improvement was largely within the salaries and employees benefit line, which was down 8% over both comparative periods. Reflected in the linked Q1 was the annual reset on FICA and unemployment insurance and the annual payment into our HSA accounts. When compared with last year's Q2, the decrease was primarily due to lower incentive accruals of $1,200,000 partially offset by merit increases in strategic hires.

Speaker 3

Our expectation for the full year expense run rate is a decrease of 1%. Turning to the balance sheet Reviewing movements in the Q2, total loans were up approximately $12,000,000 Of that, commercial loans increased 1% or $11,000,000 Net originations were $54,000,000 during the quarter compared with $56,000,000 of net originations in the Q1. We've seen a slowdown in commercial real estate loans given the rising rate environment and C and I originations remain unfunded to date, muting growth in the portfolio. The current pipeline remains active and stands at $87,000,000 at the quarter end. We expect total commercial loan growth to be approximately 3% in 2023.

Speaker 3

Our credit metrics remain sound despite the rise in non performing loans, which reflects just a single commercial credit of $6,500,000 that is still accruing and we expect that loan to come current in the 3rd quarter. Criticized loans decreased during the quarter by $19,000,000 from $93,000,000 at March 31st to $74,000,000 as of the end of second quarter. Total deposits of $1,790,000,000 decreased $63,000,000 or 3% from the Q1, dollars 48,000,000 of which consisted of typical It is however still a customer count and a source of funding. Overall, our core deposit levels have been solid given external market forces At June 30, the percentage of uninsured and uncollateralized deposits was steady at 19%. Average total deposit balances were stable at $1,820,000,000 during the quarter when compared to the linked Q1.

Speaker 3

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 to CDs. As mentioned earlier, these trends and pricing Pressures have an accelerated impact on our margin for the Q2 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. Currently, we expect our NIM to experience approximately 20 basis points of compression in the Q3 of 2023.

Speaker 3

Beyond the Q3, it's 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 toward the end of the year. With that operator, we would now like to open the line for questions.

Operator

Thank you. We will now be conducting a question and answer First question comes from the line of Nick Cucinelli with Howe Group. Please go ahead.

Speaker 4

Good afternoon, everyone. How are you today?

Speaker 2

Good, Nick. How are you?

Speaker 3

Good. I'm doing well, Nick. Good,

Speaker 4

good. On the loan growth Sai, I heard your commentary for 3% commercial growth in 2023. Can you help us think about your full year expectation for the overall portfolio?

Speaker 3

For the overall on the can you just clarify a little bit, Nick? You mean just The total growth or Yes,

Speaker 4

yes, exactly. Just including the residential and the residential component as well.

Speaker 3

Yes. 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 year.

Speaker 4

Okay, great. And then just a follow-up on the expense guide. Clearly, a great job of controlling costs so far and finding efficiencies. Just to get to that Minus 1% rate by the end of the year, it kind of assumes a sizable pickup in the back half of the year. Is that pretty ratable Across the last two quarters or is there a pickup in the Q3 that kind of gets you there?

Speaker 3

No, I'd say Both quarters would be equally sized from the total gross expense.

Speaker 4

That's very helpful. And then just on the loan pricing side, can you just help us think about what rates you're getting on your core commercial real estate product?

Speaker 3

Yes. So we're probably getting high 6s anywhere from 6.5 to 7. Depending obviously on term and maturity, but that's probably where it's falling in. So that's anywhere between 2.25 $2.50 off of our current over our current funding source.

Speaker 4

Wonderful. Thank you for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. Next question comes from the line of Alex Twerdahl with Piper Sandler. Please go ahead.

Speaker 5

Hi, good afternoon.

Speaker 2

Good afternoon, Alex. Hello, Alex.

Speaker 5

All right. I wanted to ask about loan asset sensitivity and kind of what kind of lifts May still be to come on the loan portfolio. I seem to remember you guys have 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 lift in that portfolio as the year continues to progress?

Speaker 3

Yes. There is about $320,000,000 in variable and there are we haven't reached any ceilings on those. So We would expect I mean there are some resets across the month, but so there's some going 30 days or 60 days from a change in prime. But just looking at a full year, you would expect a 25 basis point if it's a 25 basis point lift, we'd get that on the $300 and something 1,000,000

Speaker 5

Okay. I guess sort of bigger picture when you think about asset sensitivity and as we maybe later this year transition a rising rate environment to a potential lower rate environment, how would you say you're positioned these days? I mean, it seems like the Cost of deposits is obviously moving higher pretty quickly, but would you say that you've kind of moved from an asset sensitivity position to a liability sensitive position? How are the models coming out?

Speaker 3

Yes. I'd say that we have moved From an asset sensitivity to liability sensitivity, I think in a down 200, we'll come out in our Q. But it's It's not significantly material from less than 5% on a down 200.

Speaker 5

Okay. And I guess as you think about obviously managing through a pretty tough rate environment And I think you alluded to sort of Phase 1 of the expense initiatives being now completed. Is it time to be Looking at Phase 2 and sort of what kinds of things could that include?

Speaker 3

Well, I think we're constantly looking For efficiencies, I do think our David, we went through we're still through the project. So we're actually a little elevated on our expenses because We're incurring some expenses when we're putting the project in. The cost efficiencies will be at the end of this year and into 2024.

Speaker 5

Okay. So I guess we're I mean if the expense level ticks back up above 15%, 15.1% or so in the 3rd and 4th As you mentioned earlier, in your response to the last questions, where do you see expenses starting, I guess starting the year with those efficiencies in place starting 2024?

Speaker 2

Well, I think we expect The efficiencies, as John said, we're going to run it 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. There's some positions that will be worked through there. But I mean, I Do you want to

Speaker 3

Yes. Alex, I would say that our the efficiency that we're going to get in 20 Or are going to offset some of the increases that we typically have merit and stuff. So I'd say it's kind of a flat at least for the Q1 of next Here is kind of what our expectation is. And we still have a lot to look at for looking through and budgeting out the remainder of 2024.

Speaker 2

I think there's also an ongoing requirement, Alex, 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 in 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.

Speaker 5

Okay, great. Thanks for taking my questions.

Speaker 2

You're welcome. Thanks, Alex.

Operator

Thank Next question comes from the line of Chris O'Connell with KBW. Please go ahead.

Speaker 6

Hi, yes. Good afternoon. You guys talked about I think $1,000,000 investment, charitable investment in the quarter, and I think it came through in other expenses. Did that all come through this quarter and other expenses? Or was that spread out over the course of the expense base?

Speaker 3

Yes. Chris, I'm sorry. Yes, that wasn't a direct Expense investment, it was actually an investment that we hold on the balance sheet. So that actually earns a return. So we've only made I think in this quarter we had about a $50,000 charitable contribution was the limit of our total contributions for this particular quarter.

Speaker 2

Yes. 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 CDFI. It's also seed capital for Venture startups and they are throwing off a return on the fund.

Speaker 6

Okay. Got it. And you guys talked about the 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 this quarter. Can you just talk through what you're seeing?

Speaker 6

How much mix shift might be remaining and where things can kind of settle out from here? And just overall the municipal kind of seasonal impact into the back half of the year?

Speaker 3

Yes. So I think Our balances, I'll talk municipal flow first. So our balances are probably high at the end of the Q1 and then again And I think we had similar increase in Q1. That's kind of the high and the low points there. So High at the end of March and then low in June and then high again into The Q3 and then low by the end of the year.

Speaker 3

So that's kind of how that ebbs and flows. It's material obviously, but it's pretty predictable. As far as movement from transactional accounts or savings accounts, I think that's all reflective in our expectation of the margin. The 20 basis points that's kind of our That's reflecting the movement there. And then we have seen some slowdown of that And a lot of that margin compression we've seen through June and some moderation of that and that's why we're for the Q4 the rest of the year, we're hopeful that we're going to see some that 20 basis points could be stabilization point.

Speaker 6

Okay, great. And do you guys have any updated deposit beta For this full tightening cycle?

Speaker 3

Yes. I think we're looking for a little more data Through the Q3, really to 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 volatility there and We really haven't to predict where that's going. We don't have the data at this point.

Speaker 6

Okay, got it. And on the credit side, I think you mentioned in your prepared comments that we expect the one non accrual that was moved over this quarter to become In 3Q, just any color you can provide around that relationship?

Speaker 3

Sure. It's not a non accrual, it's 90 days and still accruing, Chris. So It's just it has it's a senior living center that has some funding issues through the state Our expectation is delay that that will come around in Q3. So we haven't classified it as a non accrual at this point Based on our expectation of it, coming current.

Speaker 6

Okay. Got it. And as far as just the overall credit outlook, obviously not too much movement here and net charge offs have 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 and how you're seeing that how that might progress into the back half of the year?

Speaker 3

Yes. I think our hotel portfolio, now we currently it's a small amount that's kind of in our criticized In our portfolio, I'd 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've as I mentioned earlier, we saw $19,000,000 reduction in that. Most of that was in our C and I portfolio, Operating portfolio operating company portfolios. But our hotels, we do. We have 1 in nonperforming that's pretty big $7,000,000 and then a couple other that are We see progress in each of those and that's where if we do have additional reduction in benefit That's where we'll see it.

Speaker 3

Now under CECL, a lot of our Amounts that are driven by the where the economy is. And so as the economy goes, the CECL will go. So predicting that, At least as long as things stay stable, we see our provision kind of staying it will be represented by the growth that we have In the portfolio.

Speaker 6

Okay, great. And on the fee side, insurance fees are strong. I know a lot of it's seasonal, but also year over year. I mean is that strength expect to continue into the back half of the year?

Speaker 3

Yes, we do. I mean, a lot of that strength is really in the industry. They use 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 And our commission is based on the amount of premium that our customers are paying because of the increase in the industry.

Speaker 6

Okay, great. And is that other income line just on the I think MSR benefit in this quarter, is that Shakeback down to 1Q levels or more similar to what we've seen in 2022?

Speaker 3

Well, there is loan fees in there too. So the 2 of them together, It does pop around a little bit just based on volatility and interest rate markets and it's hard to be predictable on that.

Speaker 6

Got it. Appreciate the time. Thanks for taking my questions.

Speaker 3

Okay, Chris.

Operator

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.

Speaker 2

Thank you. I'd like to thank everybody for participating in the teleconference today. We certainly appreciate your continued interest and support and we ask that you please feel free to reach out to We look forward to talking with all of you again when we report our Q3 2023 results. We hope you have a great day. Thank you very much.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Evans Bancorp Q2 2023
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