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spk06: Greetings. Welcome to the Evans Bank Corp. First Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to your host, Deborah Pawlowski. Please go ahead.
spk01: Thank you, and good afternoon, everyone. We certainly appreciate your interest in Evans Bancorp and for your taking the time today to join us on our call. I have here with me David Naska, our President and Chief Executive Officer, and John Connerton, our Chief Financial Officer. David and John will review our results for the first quarter of 2021, and then we will open 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 www.evansbank.com. If 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 materially from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings relief 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 at www.sec.gov. With that, let me turn it over to David to begin.
spk03: Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us for the call today. As we begin, I'd like to once again take this opportunity to thank all our associates for their continued outstanding efforts and ongoing commitment to support the needs of our clients and communities. It has been more than a full year now since the onset of the COVID pandemic in the U.S., and this has certainly been a difficult operating environment, but we are starting to see light at the end of the tunnel. While we're not out of the woods yet, the first quarter felt more like a typical quarter of business operations, especially considering the other significant activities that took place this past year, with two acquisitions and our headquarters move. Overall, the first quarter marked a very solid start to the year, reflecting the strength of our diverse business model, our focused actions in support of our clients and communities, and the execution of our long-term strategy. We are reporting earnings of 89 cents per diluted share on net income of $4.9 million, including a $313,000 provision primarily due to one commercial relationship. John will provide more detail, but absent that credit, we would have experienced a release of provision reflecting solid credit quality across our portfolio and continued positive macroeconomic trends. Loan and deposit levels were up significantly year over year, given the addition of Fairport Savings Bank, or FSB, and active engagement with the Paycheck Protection Program both last year and this. In fact, as part of Phase 2 of the PPP, we funded approximately 950 loans for $89 million during the quarter. The average size of a PPP loan this quarter has tended to be smaller, while 70% of the loans originated went to businesses with less than 10 employees. We estimate our work helped the businesses that received these loans protect approximately 11,000 jobs in the communities we serve. We've continued to assist many existing and new clients gained in the first round of PPP to navigate and secure funding for Phase 2. Many of those newer clients were not serviced or had been turned away by other banks in the first round. This has continued to be an important platform and opportunity for us to build and deepen relationships and ultimately offer other products and services. It is important to note that while our loan growth for the quarter of $53 million reflected the latest round of PPP funding, we did experience very healthy commercial originations of $90 million. Those originations, however, were offset by a heightened level of refinancing and payoffs, given the low rate environment and excess liquidity that exists in the market. Given the ongoing pandemic impact, we are still unable to pursue many of the activities that we would normally, such as full attendance at community events and greater in-person customer interaction. Despite the restrictions on our interactions, we are experiencing a resurgence in loan demand in both commercial real estate and C&I projects. we remain confident in our ability to drive future loan growth as our commercial pipeline is at a record level of approximately $100 million. In addition, during the first quarter, approximately 15% of our originations and a similar amount of the pipeline came from the Rochester market. Given the current operating environment, we are pleased with the progress in that market and anticipate greater traction as economic recovery further unfolds. Our strong performance, focus on capital management, and shareholder returns enabled us to increase the company's cash dividend once again, marking the 11th increase over the last nine years. A $0.60 per share per common share semiannual dividend was paid in early April, approximating a 3.5% annualized return. In support of our commitment to deliver value to shareholders, we announced in February also a renewal of our stock repurchase program, authorizing the repurchase of up to 300,000 shares of the company's outstanding common stock. Finally, regarding the investment market, based upon public analysis, it is the bank's expectation that we will, along with perhaps 80 to 90 other financial institutions, be dropped out of the Russell Stock Index upon reconstitution in May due to increased market capitalization rates for inclusion. While disappointing, we do not anticipate but will remain vigilant to any impact to our stock values from the move and will seek to continue growing our book value through operating performance. Looking ahead, while there will be lingering headwinds, we are pleased to see encouraging signs of economic recovery and positive developments with vaccinations. Currently, we anticipate having our associates return to our headquarters in early July. There is a sense of normalcy returning, as the market recovers and reopens and we get back to the basics of relationship banking. We believe we are in a strong position to continue to drive forward with our strategy and deliver performance. With that, I'll hand it over to John to run through our results, and then we'll be happy to take any questions. John?
spk02: $1 million, or $0.89 per diluted share in the first quarter, compared with $0.2 million, or $0.04 per doula to share in last year's period. The increase reflected higher net interest income due to FSB and fees earned in connection with PPP. Also, last year's first quarter had an elevated loan loss provision to reserve for the deterioration of economic trends and conditions related to the COVID-19 pandemic. The decrease in net income from the linked quarter was due to a $0.4 million increase in provision for loan loss, and a $0.7 million gain recognized on the sale of our former administrative headquarters during the fourth quarter. Net interest income increased 1% from the fourth quarter of 2020 and 30% from the prior year first quarter. The year-over-year increase reflected higher average interest earning assets as we recognized the benefits of the FSB acquisition and PPP lending. During the quarter, we realized $1.7 million in deferred PPP fees, compared with $1.4 million in the fourth quarter of 2020. Of the original $7.4 million in fees from the first round of PPP, there is $2.9 million remaining to be booked to income. The second round of PPP originations produced $4.1 million of additional fees to date that will be realized over their five-year terms or when forgiven. As David referenced, the first quarter provision for loan losses reflected $1.1 million and specific reserves associated with a single commercial customer relationship. This was a commercial construction loan that experienced unanticipated cost overruns for environmental cleanup. Excluding this one relationship, the bank would have released reserve during the quarter as we adjust for improvements in economic conditions, including stabilizing employment and improving GDP numbers. We continue to monitor our hotel portfolio, and I can report that we speak with these relationships on a weekly basis. Due to the seasonality associated with many of the properties, we expect to have a better feel for their long-term performance over the coming spring and summer months. We are, however, making progress as evidenced by the following occupancy statistics. Excluding properties and construction, in December, the average occupancy was 19%. Currently, we are running at 38% in building. Of note, that portfolio continues to be well collateralized. The first quarter net interest margin of 3.43 percent increased five basis points from the sequential fourth quarter, reflecting the accelerated PPP fee recognition and reduced interest expense as the bank continued to align rates on deposits. The 21 basis points decline from last year's first quarter reflects the Federal Reserve's decrease of the Fed funds rate by 150 basis points early in 2020 and changes in mix of interest earning assets, including the greater interest earning cash balances PPP loans, and residential mortgages from FSB. We believe the net interest margin has stabilized, though there continues to be some variability as the margin will be dependent on the speed of forgiveness of PPP loans, which can accelerate or slow the amortization of the related fee. Net interest income for the quarter of $4.6 million increased about $1.2 million from last year's period, which included a $0.6 million net reduction of non-interest income related to an investment in a historic rehabilitation tax credit. We also benefited from higher loan fees and an increase in the fair value of mortgage servicing rights. Non-interest income was down about $240,000 from the linked quarter, largely driven by the gain on sale of our former headquarters during that period, which can be found in the other income lines. Total non-interest expense declined 1% from the fourth quarter of 2020 due to disciplined expense management. When comparing the prior year period, the addition of FSB impacted several non-interest expense line items, including higher salaries and benefits. The effective tax rate for the quarter was 25.2% compared with 12% in the fourth quarter of 2020 and 16.7% in last year's first quarter. Absent the historic tax credit from last year, the effective tax rate was 22.1% and 25.4% in the fourth and first quarters of 2020, respectively. Turning to the balance sheet, the loan portfolio increased 501 million, or 40%, compared with last year's first quarter, which reflects 271 million in loans from FSB. The previous PPP portfolio funded during 2020 of 203 million has experienced a total of 55 million in forgiveness to date, of which $39 million was forgiven during the first quarter of 2021. The ending balance of all PPP loans as of March 31st was $237 million. Compared with the linked 2020 fourth quarter, loans grew 53 million or 3%. As David mentioned, this increase reflected our rapid response to the needs of customers for the latest round of PPP funding, as we originated $89 million in PPP loans during the quarter. We also funded a healthy level of commercial originations, which included $70 million in commercial real estate and $20 million in C&I. About half of the commercial real estate originations were construction loans, largely for multifamily and community development projects. These loans were mostly unfunded and did not add to growth in balances, but are expected to fund as the construction season ramps up. Additionally, we have seen lower line usage impact commercial balance growth as customers have benefited from the liquidity provided by government stimulus plans. Commercial loan payoffs excluding PPP during the quarter totaled $44 million, which comprised mostly of early paydowns from continuing customers and a smaller number of payoffs due to customers which have sold their companies. The combination of all this activity resulted in a slight decline in the commercial loan portfolio compared to the fourth quarter of 2020 when excluding PPP loans. Residential originations were $32 million for the first quarter, but those, too, saw substantial refinances and payoffs that resulted in growth of $8 million for the quarter. Total deposits of $1.9 billion grew 41% or $544 million since last year's period and was driven by FSB, which added $239 million of deposits. We also benefited from heightened liquidity levels of commercial customers, including deposits related to PPP loans, increases in consumer deposits from government stimulus payments, as well as slower consumer spending. Those factors largely account for the $101 million or 6% increase in deposits from the sequential fourth quarter. That concludes my comments, so we would now like to open the line for questions.
spk06: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Alex Tordell with Piper Sandler. Please go ahead.
spk03: Hey, good afternoon. Good afternoon, Alex. Good afternoon, Alex.
spk04: First off, John, I appreciate your comment on expecting NIM stability from here. Can you just talk a little bit about what underlines that assumption? Is it whether or not it includes things like PPP forgiveness in the second quarter and what it contemplates in terms of the size of the average balance sheet and liquidity, et cetera?
spk02: Sure. I think what's going to drive the NIM – we continue to have some yield pressure down on the loans on the commercial side. However, there has been some uptick from our originations from fourth quarter to first quarter on our originations due to the increase on the yield curve. So we're benefiting from that, but we also still have some ability to reprice some of our deposits. It's not as much in there at this point, but there is still some opportunity going forward. So the So the outcome of those two is going to lead to some stability. And then included in there is about the similar PPP fees through the second and third quarter, with our expectation that most of the PPP fees from round one will be exhausted through the income statement through the end of the third quarter, beginning of the fourth quarter. And we're not anticipating... any PPP round two here deferral fees to start forgiveness until the end of the fourth quarter and beginning of next year. So those are kind of the major assumptions driving. As far as growth, David indicated we have about $100 million in our pipeline, which we feel that the growth should start turning around such that it should overcome some of the major payoffs and refinances that we've seen in the past.
spk04: Okay, appreciate all that commentary. So if I put it together, it sounds like an instability plus the balance sheet growing a little bit means the NII trends a bit higher as the year progresses.
spk02: That's a safe conclusion, yes.
spk04: Perfect, thank you. And then can you talk a little bit about the tax rate came in a bit higher. Obviously, it didn't have the tax credit impact from last year carrying through. But is 26% or 25.2% the right tax rate to – to be using for the remainder of the year?
spk02: There is some seasonality to some of the tax things that we utilize to limit our tax rate. And so our expectation is it'll come further down to closer to the 24% on an annual basis.
spk04: Great. Thank you for taking my questions.
spk02: Okay.
spk06: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Bryce Rowe with HOFT. Please go ahead.
spk05: Hi. Good afternoon. Appreciate you taking the call here.
spk02: Hi, Bryce. Hey, Brian. How are you?
spk05: I'm good. I'm good. Can we talk a little bit about the kind of the payoff activity that you're seeing, and I think it's a pretty common theme across the space. But any visibility into, you know, what you might see as we work into the second and third quarters, especially considering the, I guess, the record commercial pipeline you have right now?
spk02: So I'll take that. I think just I guess to note on the payoffs that we've seen, kind of as I suggested in the commentary, we're not seeing it from – from competition that they're taking away. There is some of that, but it's mostly that there's excess liquidity in the market so that our current customers are paying down a lot, and sometimes early, some of those credits. As well as there has been, the market has, there is a lot of activity around M&A in our customers' industries. So we have seen those. So the good news is we, you know, Those payoffs that we are losing, we're not losing the competition. When we do have an opportunity to get in front of our customers if they're looking to refinance, we typically are winning those. But we expect or we're seeing those things continue to some degree, but we think a lot of them have kind of played out to some level. But our expectation on payoffs should start to moderate in the second and third quarter, but we do expect that there will still be some of that going forward.
spk03: And that's obviously in the commercial book he's talking. We have seen refinance and payoff activity in the consumer book. And some of that, you know, we did an acquisition. We're seeing a little bit of that. But we expect that to stabilize a bit too.
spk05: Okay. Okay. And then, you know, maybe you all can speak to, you know, the opportunity in Rochester. I think you called it out in terms of percentage of originations and pipeline, you know, tied to the Rochester market. So, you know, maybe, I mean, I'd love to hear just some commentary around what the opportunity might be, frame the opportunity for us in that market.
spk03: All right. I'll try to do that for you, Bryce. I'm not going to, you know, it's hard to be real specific, but I would say that we think there's opportunity. It is a bit of a smaller market. We are seeing a fairly strong or robust activity, especially in the Cree side of the house. There is a fair amount of financing tire kicking going on right now as we talk to them. We are trying hard to make sure that we get relationships built up with C&I credits as well. The market has produced, like we said right now, about 15% of the stuff that we've seen in the last quarter was coming out of Rochester. The issue we've had is getting awareness that we've entered the market. We have been there. We have been there for 12 years lending. This was a boots-on-the-ground play a little bit, and it's been a little tough to get in front of people with COVID still going on, but we're starting to see that. thaw a bit, where we can get out in front of people, let them know we're in the market. We did put a team out there, a lending team out there on the commercial side. They had a big mortgage operation that helped us stand up a bigger mortgage operation for ourselves. And the deposit base is five branches that, again, there was a there weren't a lot of people coming into the branches. Lobbies were closed for a period of time. So all that awareness that will start to happen with being out in the market should help us get greater traction. But we think there is a fairly reasonable opportunity there. There are less, you know, when you look at our market, our market probably has M&Ts about 63% of this market. You've got Key Corp 17% of this market. When you look out in Rochester, M&T is more like 20%, and then you've got some other community banks out there. So we think we set up pretty well to do well in that market, and we'll see.
spk05: Okay. That's good detail there. And then, you know, maybe just a question around the insurance business and whether you're, you know, you're seeing a little bit of growth there year over year, first quarter to first quarter. Just curious if, you know, with the potential that we get some economy reopening, does that give you some opportunity there on the insurance side to maybe drive a little bit of fee income growth?
spk03: The short answer is yes. The longer answer is it's a little more complicated. We think that the legs of the stool are P&C, which is – Property and casualty is a commercial side. We expect bigger growth on that side. Certainly, as the economy opens up, talking to businesses opens. The personal lines has been a challenging growth story over the last couple of years as some of the big players, whether it's GEICO or Allstate or nationwide, really have taken to much greater digital capacity and, you know, a lot of advertising. We've maintained our client base. It's been a little slower to grow. We've moved to a more direct service model on that, which has helped us. And then the third leg of the stool is employee benefits. We acquired a company at the end of 19, so really starting in January, and we are starting to see a lot of activity, not necessarily translating to sales just yet, but we are seeing good activity getting out and making people aware. Our existing customers and then new customers, we did hire a new salesperson in that area that cuts between both Buffalo and Rochester, well-known in that space, and we think that's making a difference in getting the awareness there. So we do think there's opportunity as the market opens, but it's going to be a little nuanced in where the opportunities are going to come from.
spk05: That's good stuff. All right. Thank you so much. Good to talk to you all.
spk06: Thank you. I'll turn the floor over to David for closing remarks.
spk03: All right. I'd like to say thank you to everyone for participating in the teleconference today. We certainly appreciate your continued interest and support. Please feel free to reach out to us, John or myself, at any time. We look forward to talking with you all again as we report our second quarter 2021 results, and we hope you all have a great day.
spk06: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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