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spk00: Greetings and welcome to the Evans Bancorp Second Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, Investor Relations for Evans Bank Corp. Thank you. Please go ahead.
spk05: Thank you, Donna, and good afternoon, everyone. We certainly appreciate you taking the time today to join us and your interest in Evans Bank Corp. Here with me, we have David Naska, our President and Chief Executive Officer, and John Connerton, our Chief Financial Officer. David and John will review our results for the second 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, and 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&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 relief, as well as with other documents filed by the company with Securities and Exchange Commission. You can find the documents on our website or at sec.gov. So with that, let me turn it over to David to begin. David?
spk02: Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us for the call today. As we get started, I'd like to once again take this opportunity to thank the entire Evans team for its diligent efforts and continued outstanding commitment to both drive our business and support the communities we serve. Overall, we delivered record earnings for the quarter with net income of $6.3 million compared with $500,000 in last year's second quarter, up 30% from $4.9 million in the first quarter of this year. These results reflected a strong emergence from the pandemic as the economy recovers and were driven by flexibility, responsiveness, and engagement with clients and prospective clients throughout this period. Our customer base grew and we expanded our market presence into Rochester. While still addressing our hospitality portfolio, our disciplined approach to credit played out in our results as we recorded a notable provision release due to improved credit and economic conditions. Loan originations were at record levels once again, though from a cumulative standpoint, total loan balance growth was muted given the heightened level of refinancing and payoffs in the historically low-rate environment and excess liquidity that remains in the market, combined with ongoing Paycheck Protection Program loan forgiveness. We feel we captured the pent-up demand in both commercial and consumer lending and regained the momentum that had been building pre-COVID. which helped drive higher net interest income. Importantly, our loan pipeline remains solid, which engenders confidence that we can generate growth, excluding PPP forgiveness, over coming quarters. As we noted on our last call, we spent tremendous time engaged with our associates regarding the return to our offices, while continuing to demonstrate flexibility and seeking to address concerns surrounding workplace safety. Approximately 20 to 30% of our associates were working on-site on an average day, and on July 6th, we began bringing more staff back to our new administrative office. The majority of Evans associates based at our administrative headquarters are eligible for a hybrid work schedule, with many splitting their work time between home and office. We've asked these associates to work on-site at least three days a week. but they are welcome to work exclusively in the office if they desire relative to their positions and responsibilities. Overall, we have been pleased with how productive our teams have been throughout the pandemic and believe this hybrid model will be beneficial to all stakeholders as we move forward and will allow us to continue recruiting and retaining top talent. A new bank branch office in a development known as Westminster Commons, a low-income, senior housing project financed by the bank, which is located in an underserved market within our footprint, is nearing completion. We are fully staffed and anticipate a grand opening during the third quarter. This will be Evan's 16th branch in the Buffalo Niagara region and the 21st branch overall. We believe that this project will play an integral role in the renaissance of the east side of Buffalo, and we are proud to be part of this effort to support and move the community forward. Looking ahead, while there will be lingering headwinds, we're optimistic about our future prospects. We've built a strong, diversified, and competitive franchise that is well-positioned to support our clients in their growth and expansion plans as the economy continues to rebound. With that, I'll turn it over to John to run through our results, and then we'll be happy to take any questions. John?
spk01: Thank you, David, and good afternoon, everyone. As David noted, we achieved record net income of $6.3 million last or $1.15 per diluted share compared with 0.5 million or 9 cents per diluted share in last year's period. The increase was due to higher net interest income and a decrease in provision for loan losses reflecting improved economic trends and conditions related to the COVID-19 pandemic. Also, in last year's second quarter, the bank incurred $2.8 million of higher non-interest expenses, largely due to FSB merger-related expenses. The 30 percent growth in net income for the first quarter reflected higher net interest income and a $1.1 million lower provision for loan loss. Net interest income increased $1.8 million or 11 percent from the first quarter and 3.4 million or 23 percent from the prior year second quarter. The change over both periods reflected higher fees earned in connection with PPP loans and commercial prepayments. The increase from the prior year period was also driven by higher interest earning assets. As PPP loans are forgiven, the company is accelerating the recognition of fees that were being amortized over the original life of the loan. During the quarter, we realized 2.5 million in deferred PPP fees compared with 1.7 million in the first quarter of 2021. Of the original 7.4 million in fees from the first round of PPP, there is 700,000 remaining to be booked to income. The second round of PPP originations produced 4.9 million of additional fees that will be realized over their five-year terms or when forgiven. The $800,000 release of allowance for loan losses represents a decrease of $700,000 in specific reserves associated with a single commercial customer relationship and improvements in economic conditions, including stabilized employment and improving GDP numbers. This was partially offset by loan growth during the quarter. We continue to closely monitor the hotel portfolio, which totals approximately $80 million, and is made up of 25 credits across 15 relationships. We are beginning to see modest improvements as the economy improves and summer travel has increased. Of note, average occupancy rates are running around 52% currently, compared with 19% at the end of 2020. The expected opening of the US-Canada border in early August gives us further optimism, as many of the locations rely on cross-border traffic. Ultimately, the whole toll portfolio continues to be well-collateralized, and we believe that we are appropriately reserved. Second quarter net interest margin of 3.62% increased 19 basis points from the first quarter, reflecting the accelerated PPP fee recognition and commercial prepayment income. The 26 basis point growth from last year's second quarter reflects those same factors, along with higher interest earning assets and reduced interest expense, as the company continued to align rates on deposits. Including PPP impacts, the net interest margin was 3.38%, and we believe this has stabilized near these levels. Non-interest income of $4.4 million increased $179,000 from last year's second quarter, primarily attributable to lower deposit service charges in last year's period, reflecting the temporary suspension of certain fees to assist customers affected by COVID-19. Non-interest income was down about $150,000 from the link period, given the decrease in other income largely due to changes in the fair value of mortgage servicing rights. While total non-interest expense increased from the first quarter of 2021, we believe expenses, which are a focus area, are being prudently managed. The change was largely resident within salaries and benefits, reflecting the annual merit increases, the capitalization of salary costs related to the origination of PPP loans in the prior quarter, and higher software costs related to an increase in ATM and online activity. When comparing the prior year period, the addition of FSB impacted several non-interest expense line items, including increased salaries and benefits. The effective tax rate for the quarter was 24.4% compared with 25.2% in the first quarter of 2021 and 16.7% in last year's second quarter. Excluding the impact of the historic tax credit transaction, the effective tax rate was 25.9% in the second quarter of 2020. Turning to the balance sheet, And specifically loans, as David mentioned, there are some items masking the strong originations we have generated so far this year. Since last year's second quarter, commercial real estate loans have increased $60 million and residential mortgages $26 million. Offsetting this is the C&I portfolio, where balances were down $75 million over that period, although about two-thirds of the decline was a result of the change in PPP loan balances reflecting SBA forgiveness. The balance of PPP loans forgiven in the second quarter of 2021 was $97 million, bringing the total of loans forgiven to date to $152 million. The remaining balance of all PPP loans as of June 30th was $145.7 million, or just a little less than half of the approximately $300 million originated. Total deposits of $1.9 billion grew 4% since last year's period, driven by heightened liquidity levels of commercial customers, including deposits related to PPP loans. increases in consumer deposits from government stimulus payments, and slower consumer spending. That concludes my comments, and we would now like to open the line for questions. Donna?
spk00: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. 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. Once again, that is star 1 to register questions at this time. Our first question is coming from Alex Tortle of Piper Sandler. Please go ahead.
spk03: Hey, good afternoon, guys.
spk02: Good afternoon, Alex. Hi, Alex.
spk03: In terms of the PPP, you had 145.7 million left at the end of the second quarter. Do you have the number that was left, the balance at the end of the first quarter handy, John?
spk02: We paid off 97.
spk01: Yeah, we paid off 97 out just to back in it that way. Okay. Go ahead. Yeah. No, no, sorry.
spk03: You were going to say something?
spk01: Nope. That's good.
spk03: Okay. And then in terms of the fees that remain, I think you said there's 700,000 left in the first round. Um, if I remember correctly, there was something like 4.1 million left in the second round at the end of, um, the first quarter. Um, so that, I mean, are there around four and a half million of fees total between the two rounds that are left, uh, that haven't yet been recognized, um, through the, through NIA? That's correct. Okay. Perfect. And then the commercial prepayment income that you cited in the press release and you mentioned a second ago that's in the NIM, can you break that out in terms of the dollar impact in the second quarter?
spk01: Say that again, Alex, the prepayments, did you say?
spk03: Yeah, I think commercial prepayment income.
spk01: Yeah, it's about a half a million dollars. Now, we do have normal prepayments just in every normal environment. This is a little – and they come in clunky sometimes. Uh, so over the, over the year we have a, you know, a, a typical amount, um, 500,000 is high for a particular quarter, but it's about 10 basis points on the NIM. But again, not all of that is, is, uh, unique because it does occur, you know, um, through every quarter typically.
spk03: Got it. And then when you talk about the, um, stability in the NIM, um, which is awesome, sort of excluding the prepayments and excluding the PPP. what are your assumptions for levels of excess liquidity in cash?
spk01: So we'll, you know, we, especially with the forgiveness coming back at us, we still have good growth from the perspective of our pipeline, as David mentioned. But we, you know, we'll probably have excess liquidity through the middle of 2022. And so we're, from where we are now, we would expect that we would start to hopefully be borrowed through the middle or hopefully the third quarter of 2022.
spk03: Okay. And I guess what I'm getting at is, you know, translating a stable NIM to NII, excluding prepayment penalties, excluding PPP. Do you expect the NII to be roughly stable as well for the next several quarters?
spk01: We would expect with the growth that we have is that NII would grow.
spk03: Okay. Um, and then just last for me, uh, when I think about expenses and you talked about some of the reopening that's happening, um, and getting your guys and your people back in, uh, in the office, um, is that going to cause expenses to go up a little bit in the third quarter?
spk01: You know, where some expenses are coming back, some expenses will be relieved of some expenses, actually. So we don't expect overall for it to be impactful to the quarter for third quarter.
spk03: Got it. Great. Thanks for taking my questions.
spk01: All right. Thanks, Alex.
spk00: Thank you. Our next question is coming from Bryce Rowe of Hofti Group. Please go ahead.
spk04: Thanks. Good afternoon. Good evening.
spk02: Good afternoon. Hi, Bryce.
spk04: Dave, maybe you could speak to the lending environment. You talked about refinance and prepayment activity. So if you could just kind of frame that against the pipeline and how you're seeing prospects for loan growth, you know, in the second half of this year and into next. And then, again, just frame it against that competitive environment that we're in.
spk02: Okay. I will try to do that. So let me say it this way. We had very strong growth for the first two quarters, as John mentioned, as I mentioned. The closings at that point were about, if I – parsed it out, it's about 80% commercial real estate, about 20% CNI. Some of that is a result of there was a tremendous amount of liquidity in the market, so businesses weren't expanding their line because they were sitting on a lot of cash, for example. We are seeing our pipeline is flipped. We are seeing more opportunities in CNI, where the pipeline is a little more evenly balanced now between CNI and CNI. So that's the pipeline. Competitively, we feel good about the growth we've experienced because everything I read seems to be saying that growth in the banking industry is a little bit muted right now in terms of production, and we're seeing some. So we feel positively about that. Looking into the future, we are seeing ourselves being able to get traction right now coming out of COVID, both from a pent-up demand kind of situation and also we had pretty good momentum going into the pandemic, and we believe we're recapturing that momentum coming out. So is it going to be a little lumpy, as John mentioned? Yes, we think so. However, we think that the arrow is pointed north in terms of our ability to capture some growth going into the future quarters. And we said that in my speaking comments. So does that answer your question, Bryce, in terms of what we're thinking about?
spk04: I think so. And I mean, I'm just curious if you anticipate, I mean, obviously you're going to have refinance and prepayment activity every quarter, like John said. Sounded like it was somewhat elevated here.
spk02: in the second quarter do you have any visibility into you know continued um prepayment activity kind of being elevated or do you kind of expect it to to normalize um as we as we move forward i'll let uh john give you a little more color on this but i'm gonna take the high road here and just say some of the prepayment activity is elevated because we're in a historically low rate environment and there's a lot of liquidity uh slushing around the system as soon as that starts to normalize a little bit more, we think that prepayments slow a bit. That said, we're not sure when that is. Your crystal ball is probably better than mine in terms of that. Inflation, if it were to rear its head, we believe will slow some of that as well. But there is a big overhang on the liquidity piece here. So, John, do you want to add anything?
spk01: The only thing I would add, Bryce, is that... We're seeing a deceleration of refis. So we're seeing it just in our own portfolio. So it is slowing. So that's something that gives us some indication that our growth, with the originations that we had, again, we had a record pipeline in the first quarter that kind of drove good commercial loan growth, excluding PPP. In the second quarter, we still have what we would say is a healthy pipeline, not a record pipeline like we had in first quarter. So with that healthy pipeline and some slowing refis, we think growth is going to be at least easier than it has been over the last three or four quarters.
spk02: And if you're also talking about consumer loans, we are seeing a slowdown in the refinance activity, not monstrously, but we are starting to see a little back off on what was a heavy refinance boom that everybody experienced, and we're seeing more normal activity in the marketplace. Got it.
spk04: Okay. Maybe one more for me, shifting gears to the allowance. Allowance percentage came down a little bit here in the second quarter, and, you know, just want to try to juxtapose that against your comments about the hotel portfolio showing some improvement, the U.S.-Canada border opening up here, you know, later in the summer or early fall. So maybe you could help us understand perhaps what, if there's any specific reserve or cue factor within the allowance methodology that could diminish here in the near future and could bring that allowance down even more.
spk01: So the biggest piece of what's, you know, that we reserve for in 2020 that, you know, reserve for the uncertainty and risk in our portfolio that's left is We had the uncertainty and risk around the economy. We've kind of worked quite a bit back on that. What's left is really the risk that we had in the hotel portfolio, and that still remains, and we haven't moved that. But as we get performance in that portfolio, and we'll start to see that as the summer results come through, that would be the amount of reserve that we have that could start to move the provision one way or the other.
spk04: And, John, would you mind quantifying kind of what that is as part of the $20 million reserve right now?
spk01: It's an $80 million portfolio, and we had, you know, we reserved probably an additional, you know, 4% on that portfolio. Great.
spk04: All right. I think that's it for me. Appreciate y'all's time.
spk02: Thanks, Bryce.
spk00: Once again, ladies and gentlemen, that is Star 1. If you do want to register a question at this time, We're showing no additional questions in queue at this time. I would like to turn the floor back over to the management team for any closing remarks.
spk02: Thanks, Donna. I'd like to thank everyone for participating in our teleconference today. We certainly appreciate your continued interest and support. Please feel free to reach out to us at any time. We look forward to talking with all of you again when we report our third quarter 2021 results, and we hope you have a great day. Thank you very much.
spk00: Ladies and gentlemen, thank you for your participation. You may disconnect your phone lines or log off the webcast at this time, and have a wonderful day.
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