Evans Bancorp Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 30, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Evans Bancorp First Quarter Fiscal Year 20 24 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 certainly appreciate you taking the time today to join us as well as your interest in Evans Bancorp. Here with me, I have David Nasca, our President and CEO and John Connorton, our Chief Financial Officer. David and John are going to review the results of the 2024 Q1 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.evansfay.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 materially 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. So with that, let me turn it over to David to begin. Dave?

Speaker 2

Thank you, Debbie. Good afternoon, everyone. We appreciate you're joining us today. I'll start with a review of the highlights from the recent quarter and we'll then hand it off to John to discuss our results in detail. 1st quarter results reflect solid performance across key business segments.

Speaker 2

Against a continued challenging environment, our net interest margin demonstrated resilience and saw some sequential expansion. While the cost of funding continues to rise, we see the rate of increase decelerating, which provides a stabilizing net interest margin outlook, as John will discuss in more detail later. During the quarter, we opportunistically used market rate movements to lock in a modest amount of wholesale funding to manage against possible higher rates for a longer period as well as prefunding some deposit seasonality and expected loan growth. This included $50,000,000 in broker certificates of deposit and the extension of maturities on $40,000,000 of Federal Home Loan Bank overnight borrowings for 3 years. Our organic deposit gathering during the recent quarter sets a strong foundation for future loan expansion.

Speaker 2

While growth in loans during the Q1 was muted, we are particularly optimistic relative to our significant loan pipeline approximating $95,000,000 Across our market areas, our consumer, business banking and commercial teams continue to build a diverse pipeline of high quality loans in a difficult rate environment. We are also seeing early benefits of strategic investments in our commercial banking team and enhancements to prospecting tools. Commercial activity in Rochester has provided additional growth to our pipeline and in February, in addition to the recently acquired regional director, we bolstered the team with a new relationship manager. While we have been and are vigilant in managing expenses, we recognize the importance of strategic investments in both people and technology. These investments are pivotal in our efforts to effectively scale the organization, drive future efficiencies and ultimately deliver enhanced customer facing solutions and experience.

Speaker 2

By continuing to refine operations and invest in the right areas, we are poised to not only weather challenges, but also seize opportunities for growth. As we approach our annual meeting of shareholders, I wanted to make note of some adjustments to our Board, which will occur following the meeting on May 7. As outlined in the proxy statement, we will bid farewell to 2 directors who will not be seeking reelection, Robert Miller Jr. And Kevin Maroney. Their departure will result in a reduction in our Board size to 12 members.

Speaker 2

Kevin Maroney, who joined us through the Fairport Savings Bank acquisition in 2020, has played a pivotal role in our expansion efforts, particularly in bolstering our presence in Rochester. We extend our gratitude to Kevin for his contributions and wise counsel throughout the integration process and for his governance after the acquisition. Robert Miller Jr. Has been an integral part of our Board for an impressive 23 years. His tenure as the long serving President of the Evans Agency, the bank's insurance business and his building of that business until his retirement in 2019 speaks volumes of his dedication and expertise.

Speaker 2

We owe Bob a debt of gratitude for his unwavering commitment to Evans. His visionary leadership not only left a profound impact on our Board, but also played a crucial role in driving the growth of the insurance agency organically and through 15 acquisitions, culminating in its successful sale in the Q4 of last year. On behalf of the entire Board and Evans family, we wish them both the very best in their future endeavors. As we progress through the year, our primary focus remains on customer acquisition and relationship management to foster loan and deposit growth. Concurrently, we are committed to optimizing operational efficiency and customer experience as well as managing expenses diligently to deliver sustainable returns.

Speaker 2

Central to our strategy is our community based customer centric model, which we believe is our core strength. This enables us to effectively support, serve and expand our client base across all economic environments. By prioritizing clients' needs and fostering strong relationships, we are confident in our ability to navigate the challenges being faced and capitalize on opportunities for growth. With that, I'll turn it over to John to run through our results in greater detail and then we will be happy to take any questions you may have. John?

Speaker 3

Thank you, David and good afternoon everyone. As a reminder, the comparative periods of 2023 include business activity relating to the Evans Agency or T. We completed the sale of that business to Arthur J. Gallagher and Company on November 30, 2023. For the recent quarter, we delivered earnings of $2,300,000 or $0.42 per diluted share.

Speaker 3

The linked Q4 of 2023 had net income of $10,200,000 though included a gain of $20,000,000 from the sale of Tea as well as $1,500,000 of insurance revenue that was recognized prior to the sale, partially offset by the $5,000,000 pre tax loss on the sale of investment security. When excluding key and the atypical items, our core banking business saw sequential earnings improvement. When compared with sequential earnings improvement. When compared with last year's Q1 earnings of 5,800,000 dollars the primary drivers of the year over year change were lower net interest income and a change in provision. Net interest income of 13,900,000 the linked Q4, though was impacted when compared with the prior year period by higher interest expense given competitive pressure on deposit pricing, which accelerated for most of 2023.

Speaker 3

This more than offset increases in interest income driven by growth in our variable rate portfolios. 1st quarter net interest margin came in at 2.79 percent, up 4 basis points from the linked quarter. This was slightly favorable to our expectations of a flat NIM as we benefited from 4th quarter balance sheet restructure and continued prudent pricing strategy. I will talk to our NIM expectations at the end of my remarks. The $266,000 provision for credit losses in the recent quarter was due to slower prepayment rates and higher net loan charge offs, partially offset by improving economic factors.

Speaker 3

Total non interest income was down $16,300,000 from the sequential quarter. The reduction from the Q4 of 2023 was due to the gain on sale of Tea of $20,200,000 $1,500,000 in the Tea insurance revenue offset by the $5,000,000 investment loss, which were all recognized in the sequential quarter. The remaining increase in non interest income from the 4th quarter was primarily due to an increase in the value of mortgage servicing rates. Total non interest income was down $1,800,000 when compared with the Q1 of 2023. The majority reduction was related to $2,300,000 in tinsurance revenue recognized in the Q1 of 2023.

Speaker 3

This was offset mostly by an increase in the value of mortgage servicing rights during the Q1 of 2024. The decrease in non interest expense from the Q4 of 2023 was due to lower incentive accruals of 2,100,000 dollars $1,000,000 of non interest expense related to Tea, primarily salaries and employee benefits that were recognized during the Q4 of 2023 prior to the sale. In addition, dollars 300,000 of charitable contributions and $100,000 of pension settlement expenses were included in other expenses during this financial quarter. The recent quarter benefited from lower incentive accruals, but did include about $500,000 in other costs that are seasonal for the Q1 and not expected to be repeated in subsequent quarters of 2024. Those include the annual resets of FICO and unemployment insurance, the annual payment into our HSA accounts and some accelerated equity compensation for those employees in retirement eligible status.

Speaker 3

The decrease in non interest expense from the Q1 of 2023 was due to $1,800,000 of non interest expenses relating to Tea, of which salaries and employee benefits were $1,500,000 During the Q1 of 2023, salaries and employee benefits excluding the 1,500,000 dollars related to T were $7,900,000 flat with the Q1 of 2024. The remaining increase in total noninterest expense of $200,000 is due to higher technology and communication expenses recognized by the bank during the Q1 of 2024. Adjusting for the Q1 additional costs within salaries and benefits and adding for the full impact of merit increases awarded at the end of this Q1 in 2020 The non interest expense for the Q1 is a close approximation of the expense run rate to use going forward. Our expectation for the bank only 2024 year expense including TEE's 2023 expenses is a decrease between 1% 2%. We continue to strategically strengthen our balance sheet during the recent quarter, adding $55,000,000 of broker deposits at favorable rates and extending approximately $40,000,000 of overnight borrowings in order to manage interest rate risk as David suggested.

Speaker 3

Total deposits increased $173,000,000 or 10% during the quarter and were up $41,000,000 or 2% from the end of last year's Q1. Reflected in the sequential increase were brokered time deposits and seasonal inflows of municipal deposits. From a product perspective, the only category in which we saw a decrease was commercial savings, which was down $3,000,000 Those deposit offloads can be considered seasonal and typical in the Q1 due to distributions and tax payments that commercial clients make at the beginning of the year. Total loans were flat with the linked quarter as net commercial originations were $36,300,000 compared with $58,000,000 of net originations in the 4th quarter. We continue to be selective in underwriting positions, but are seeing opportunities in commercial real estate between multifamily and warehousing warehouse facilities that beat our credit brands.

Speaker 3

C and I line balances remain muted and continue to impact growth in that portfolio. We are making some progress to offset the low line usage as the majority of the originations in the Q1 were C9. Total loans were up $63,000,000 year over year, which reflected commercial real estate loan growth of $76,000,000 partially offset commercial and industrial loans, which were down $15,000,000 The current pipeline is strong and stands at $95,000,000 at quarter end. We expect our current liquidity position to be the foundation that supports expected commercial loan growth of approximately 5% in 2024. Credit metrics remain sound with a slight increase in non performing loans on a sequential basis.

Speaker 3

Criticized loans were $70,000,000 atquarterend compared with $72,000,000 at the end of the 4th quarter. This was a $23,000,000 decrease from last year's Q1 of 93,000,000 dollars We have been successful in managing our deposit pricing strategy to include balancing liquidity with profitability and are confident in our ability to continue to navigate the evolving market dynamics. We will continue to fight for deposits by maintaining competitive rates in our markets and when warranted offer preferred pricing for poor clients. The balance sheet impact for adding brokered deposits anticipated seasonal deposit fluctuation and funding expected loan growth with longer term borrowings was a temporary increase in Fed funds sold balances. While the impact of this short term leverage is adding to net interest income, it will decrease the NIM in the 2nd quarter by 13 basis points.

Speaker 3

Deposit rate offerings are currently stable in our market. However, we continue to expect modest increases in cost as customers continue to move balances from transactional counts to interest bearing counts as well as the CD portfolio continue to be priced. Given those impacts, we expect our NIM to be 2.65% in the Q2 of 2024. With that operator, we would now like to open the line for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. Our first question comes from the line of Alex Twerdahl with Piper Sandler. Please proceed with your question.

Speaker 4

Hi. Good afternoon, guys.

Speaker 2

Good afternoon, Alex.

Speaker 4

John, I was hoping maybe you could talk a little bit more about the sort of the overall balance sheet management strategy as the year progresses. I know you're sitting on a little bit more liquidity at the end of the Q1 than we typically see on balance sheet and maybe due to the brokered and the extension of borrowings that you alluded. But how do you see that evolving over the course of the year? And also, does the balance sheet stay kind of roughly flat from where it is now or does it shrink a little bit as the year progresses?

Speaker 3

So, yes, I think I guess just to talk about the brokered CDs and the $40,000,000 FHLB borrowings that are 3 year, we those are mostly the brokered CDs. You can think of this as this is we have fluctuations seasonally from the municipal portfolio significantly. We're up $84,000,000 in the quarter on municipal deposits alone and that'll run down and out and then a little back up a little bit in the fall and then down through the end of the winter. So we're utilizing those brokered CDs where we took an opportunity in the quarter where there was some interest dips and we went out and got some wholesale funding, so we didn't have to kind of price our market and that we're going to utilize that to kind of help kind of mitigate some of that cyclicality in those municipal deposits. So that by itself again would consider the balance sheet kind of flat through the period and through to the end of the year.

Speaker 3

The other portion, the $40,000,000 is an expectation of kind of prefunding since rates again were dropped and we wanted to take advantage of the drop in rates on the longer end before it's obviously increased currently. To prefund some of our expectation as we suggest the 5% growth on our loans. And so again that kind of offset would again mean that our balance sheet would just be a movement out of the cash into the loans. So yes, in total, for that particular purposes, those 2, what I'll say, prefunding transactions, the balance sheet should stay mainly flat. However, we do expect that we'll still have some deposit growth, excluding those two types such that the balance sheet should trend up slightly after all said and done a couple of percentage.

Speaker 4

Okay, great. That's helpful color. And then when we think about the loan growth and the 5% target for the year, do you think that that will be pretty evenly spread over the remaining 3 quarters of the year? Or talk maybe about sort of what goes into that 5% overall target?

Speaker 3

Yes, I think that's a good assumption is that the rest of the year should be fairly evenly spread. Obviously, 4th quarter is a little bit more of an estimate, but our expectation is that.

Speaker 4

Okay. And then, the final question, just wanted to talk a little bit more about how you're thinking about capital management over the next couple of quarters. Obviously, you created a lot more flexibility on the capital front with the T sale in the Q4. And I'm just curious if you have any more considerations or thoughts of things like buybacks or additional

Speaker 3

there's a lot of challenges to go out and get buybacks, just based on our low liquidity level in the market and the restrictions that we have on going to get back our own stock, which we did do some buybacks in the Q1 and we'll continue to look at that and take opportunity when we can. But I think 1st and foremost, when we looked at it, our capital really there is to make sure that we're supporting our growth, especially from an asset perspective. And then secondly, to make sure that now that we're at a somewhat of a lower performance level, we want to definitely support our dividend that for years we've been consistent with. And then thirdly, yes, buybacks. But that it's a little hard to get those buybacks.

Speaker 3

So I would suggest that from a priority perspective, if I were to look at it, it's kind of 1, 2, 3 in that order. Got them.

Speaker 4

What was the amount that you did in the Q1, if you have that handy?

Speaker 3

I don't have it handy, Alex. It's a small amount. I think we did like $500,000 worth, maybe like 15,000 shares or something.

Operator

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

Speaker 5

Hey, good afternoon.

Speaker 2

Good afternoon, Chris.

Speaker 5

Yes. Appreciate all the guidance around the NIM impact. As far as the CDs that were brokered that were put on in the borrowing extensions, at what point in the Q1 did those occur?

Speaker 3

It was in the later of March, so you won't see much of an impact in the Q1.

Speaker 5

Got it. That's helpful. And how are you guys thinking about the trajectory of the NIM in the back half of 'twenty four after the kind of reset in 2Q?

Speaker 2

Well, our hope with the NIM right now is that the impact, the decreases that we've seen have moderated a little bit and we're starting to decelerate the betas on deposits here, which should help the NIM. We don't expect to see a lot of NIM expansion, but we certainly think the impacts should be flattened out here a little bit.

Speaker 5

Got it. And for the CD portfolio, what's the remaining portion of it that has yet to reprice kind of up toward market rates?

Speaker 3

Probably around 20%. We had a big piece come through in this quarter, but another 20%.

Operator

Great.

Speaker 5

And do you have what either the recent loan origination yields have been coming on at or what they are in the pipeline?

Speaker 3

Yes. Our offering rates are at least the current offering rates are somewhere between on our term loans, 7.25 percent to 7.5 percent and then our C and I is better than prime.

Speaker 5

Great. And then on the fee side, there is still kind of a lingering amount there like $150,000 in the insurance line. Does that falling out after this quarter or is that unrelated

Speaker 3

to the business? Good question, Chris. For comparative purposes, last year it was in there. Part of our wealth program, which is around $700,000 a year has always been in that line. It's been very consistent.

Speaker 3

So for comparative purposes, we're leaving it in there. Just we didn't want to reclass it out of there, but that is so that should be consistent from quarter to quarter.

Speaker 5

Okay, got it.

Speaker 2

Yes, we did benefit plans for corporations and things like that and we sort of dovetailed with the insurance. So it was in that bucket.

Speaker 3

Great. Sustaining.

Speaker 5

And then on the credit side, any commentary as to what you're kind of seeing in your markets recently? I know not much movement this quarter in the NPLs and the criticized and net charge offs pretty good as well, but any stress or any signs of stress that you guys are

Speaker 2

seeing? We continue to not see any real cracks in the CreditArmor right now. We believe that companies have been impacted by the higher rates, but we for all the reasons we've been credit conservative and I won't say we're conservative, but we've watched out for making sure that we've done loans appropriately in all environments. So we are not seeing a lot of cracks. As I said, you are seeing that we're going to see rates higher for longer we think.

Speaker 2

We think there may be a credit cycle at some point, but we're not seeing that at this point and we're working through the credits that we had that are non performing. We continue to make some progress there and we expect to continue moving forward on repairing those. So we're not seeing a whole lot of impending challenge right this second.

Speaker 5

Great. That's all I had. Thanks for taking my questions.

Speaker 3

Thanks, Chris. Thanks, Chris.

Operator

There are no further questions in the queue. I'd like to hand it back to David Neska for closing remarks.

Speaker 2

All right. Thank you, Doug. Thank you for participating today in the teleconference. We always appreciate that you're here with us and your continued interest and support. Please feel free to reach out to us at any time.

Speaker 2

We look forward to talking with all of you again when we report our Q2 2024 results. We hope you all have a great day. Thank you.

Operator

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

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Earnings Conference Call
Evans Bancorp Q1 2024
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