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spk05: Greetings. Welcome to the Evans Bancorp Third Quarter Fiscal Year 2021 Financial Results. 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 Paul-Pilowski, Investor Relations for EVBN. You may now begin.
spk02: Thank you and good afternoon everyone. We appreciate your time today and joining us for the second, third quarter, this 2021 earnings call for Evans Bank Corp. On the call today I have David Naska, President and Chief Executive Officer, and John Connerton, Chief Financial Officer, joining me here. David and John will review our results for the third quarter of 21 and then we will open the call for questions. We released our financial results just after the market closed today, and you can find that release 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&A session. These statements apply to future events 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 release as well as with other documents filed by the company with Securities and Exchange Commission. All of this can be found on our website or at SEC.gov. So with that, let me turn it over to David to begin.
spk04: Thank you, Debbie. Good afternoon, everyone. We appreciate your joining us for the call today. The third quarter produced record results for Evans, highlighted by earnings of $7 million, or 1.27 cents per diluted share. This compared with 4.5 million or 84 cents per diluted share in last year's period and up 11% from 6.3 million in the second quarter of this year. Results were supported by what has been strong loan production throughout the year. Paycheck protection program PPP fee realization and credit quality improvements reflecting underwriting strength and proactive measures with our hotel portfolio, resulting in upgrades in credit risk ratings of several relationships. As a reminder, due to the impacts of the pandemic, the bank in the third quarter of last year worked with its hotel operators to assist in providing relief until conditions improved and classified the entire hotel portfolio as criticized in recognition of the increased risk. As a great majority of these properties are seasonal in nature, the bank provided an interest-only period from last year's third quarter through this summer, coinciding with the high point of demand in those in the hotel's season. At the end of the recent quarter, all but one of those relationships have begun paying principal and interest and have paid all deferred interest. As a result of the payment performance and current operational results, we determined that $20 million of the $80 million portfolio would be upgraded out of the criticized loan category and only one relationship for $2.2 million that was unable to resume scheduled payments would be downgraded to non-performing. Although the remaining portfolio has shown improvement in occupancy rates and all amounts due have been paid, the bank is looking to establish sustained performance on these credits before upgrading. Approximately half of the $1.5 million provision recapture during the period was related to the decrease in criticized loans. I want to briefly touch on commercial loan growth. which is one of the drivers of our performance and John will provide more specific detail. We are generating strong loan production this year but PPP forgiveness and higher than typical payoffs in this historically low rate environment continue to provide headwinds to our overall loan portfolio growth. The third quarter continued to be very active for PPP loan forgiveness and through the end Through the quarter end, about 75% of total PPP loans have been forgiven, and we expect a majority of the remaining round two payoffs to occur during the next two quarters. We have continued to capture consumer lending demand and regain momentum with commercial real estate. With tremendous liquidity in client businesses, commercial and industrial lending has lagged, including lower line usage. though there are encouraging signs by the return of more CNI loan opportunities, which today make up approximately 30% of our pipeline. Our priority continues to be utilization of excess liquidity. We are strategically adding talent to supplement loan efforts both within our legacy market and new market area in Rochester, and early indications have been positive. As part of our strategy, we have spent a good deal of effort focused on refining initiatives for next year as we build out more client and operating solutions centered on speed, flexibility, and efficiency. While early in the process, distribution channel enhancements and operating efficiency pilot scenarios are encouraging. Ultimately, we believe greater operational efficiency can be had, and with an overall improvement around client engagement, we can enhance and scale returns over the long term. Lastly, as anticipated a few weeks ago, we held the grand opening of our new branch on the east side of Buffalo, a majority minority neighborhood, marking our 16th branch in the Buffalo, Niagara region and 21st branch overall. This was part of a larger development known as the Westminster Commons, a low-income senior housing project financed by the bank. We look forward to supporting the renaissance of neighborhoods on the east side of Buffalo. 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?
spk00: Thank you, David, and good afternoon, everyone.
spk03: from the prior year third quarter, largely driven by PPP fees, lower interest expense, and a higher level of commercial prepayment fees. When compared with the sequential second quarter, net interest income was down approximately 1% due to the deceleration of PPP and prepayment fees. 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 $2.1 million in deferred PPP fees compared with $2.5 million in the second quarter of 2021. Nearly all the original $7.4 million in fees from the first round of PPP have been booked to income. The second round of PPP originations produced $4.9 million of additional fees, of which $1.7 million has been recognized in income. At the end of the third quarter, $3.2 million in fees remain. The $1.5 million release of allowance for loan losses in the current quarter included $0.7 million related to a decrease in criticized hotel portfolio loans. and half a million dollars reduction in specific reserves resulting from payments received from one commercial customer relationship. Third quarter net interest margin of 3.48% decreased 14 basis points from the second quarter, reflecting lower PPP fee recognition and commercial prepayment income. The 29 basis point growth from last year's third quarter reflects higher interest earning assets, PPP fee amortization, commercial prepayment income, and reduced interest expense as the company continued to align rates on deposits. Excluding PPP impacts, the net interest margin was 3.20%. As loans from the second round of PPP are forgiven, they are adding to cash liquidity. The bank is programmatic in redeploying these funds into assets, including investments. We are taking advantage of market opportunities which extend the period of deployment. As these funds are redeployed, it is expected the net interest margin will improve to a level 15 basis points higher. Non-interest income of $5.2 million decreased $700,000 from last year's third quarter, primarily attributed to a gain on sale of investment securities recorded in the prior year period. Non-interest income was up $739,000 from the linked period, largely due to seasonally higher commercial lines insurance commissions and profit-sharing revenues. We also continue to see an increase in deposit service charges, which were up around 9%. While total non-interest expense increased from the second quarter of 2021, we believe expenses, which are our focus area, are being prudently managed. Salaries and employee benefits costs increased 565,000, or 6%, from the sequential second quarter, and 1.8 million, or 23%, from last year's third quarter. A large driver of the change was a return to more normal incentives as accruals were up $0.6 million during the third quarter of 2021 compared with a $0.7 million reduction of incentive accruals in last year's third quarter. Additionally, we, like many businesses, are contending with labor inflation as we have made a number of strategic hires in support of our continued growth. The effective tax rate for the quarter was 25.6 percent compared with 24.4 percent in the second quarter of 2021, and 11.8% in last year's third quarter. Excluding the impact of a historic tax credit transaction, the effective tax rate was 25.6% in the third 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. Total loans decreased 83 million from the second quarter of 2021. The commercial portfolio decreased $97 million from the prior period, primarily due to PPP loan forgiveness. Excluding PPP, commercial loans decreased $28 million from the second quarter. On an annualized basis, the bank's average net originations of new commercial loans, which excludes refinances of existing loans, was $256 million through the first nine months of 2021. This compares with an average net origination of $235 million for the previous four years. Although the bank is experiencing a strong production year with respect to commercial loans, including the building of a solid fourth quarter pipeline, the interest rate environment has driven elevated payoffs. The current year quarterly average commercial loan payoff was $43 million. This is more than double our typical average, which has been $21 million over the previous 16 quarters. The payoffs are mostly due to customers financing commercial real estate with conduits or government agencies and not with competitor banks. The bank remains disciplined in not relaxing its credit standards to chase the terms of these other funding sources, which structure longer maturities, non-recourse, and aggressive rates. We are seeing some deceleration in these payoff levels and anticipate they will gradually subside. The balance of PPP loans forgiven in the second quarter of 2021 was 69 million, bringing the total of loans forgiven to date to 222 million. The remaining balance of all PPP loans as of September 30th was 76.3 million, or about a quarter of the approximately 300 million originated. Total deposits of 1.9 million grew 5% 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. During the third quarter, we paid a semiannual cash dividend of $0.60 per share, bringing the total cash dividend paid during 2021 to $1.20 per share, which was up 3% from the prior year. That concludes my comments, and we would now like to open the line for questions.
spk05: Thank you. 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. One moment, please, while we poll for questions. Our first question is from Alex Tordow with Piper Sandler. Please proceed with your question.
spk06: Good afternoon.
spk04: Good afternoon, Alex. How are you? How are you, Alex? All is well, thanks.
spk06: I want to start off on sort of asking about some of the commentary, John, you had on the loan production year to date and some of the trends there. And certainly a good year so far for new originations. Would you say that that's attributable to the augmentation of the lending team? Or what do you think is really driving that trend? the higher level of originations versus prior years?
spk03: I think it's twofold. We have put on talent in the commercial loan group, both in both markets, both Rochester and in Buffalo this year, earlier this year, and those ads have added to that volume. But also, I think there has been some opening up, especially on the commercial real estate side of projects that are starting. And then also, you know, we've been with the lower interest rate environment. For those credits that we feel that are going to meet our underwriting profile, there is a lot more refinancing activity for us to go after, and we are taking, you know, some of those projects and business credits away from other banks. And that's a testament, again, to the talent that we've acquired and the talent that we've historically had here. Okay.
spk06: And so as you kind of think through, you know, I don't know if you can elaborate a little bit more on sort of the progression of those originations. I don't know if it's linear. I'm sure the pandemic threw a bit of a wrench in it for last year. But if you're kind of looking forward and sort of trying to – correlated to the size of the lending team and some of the opportunities to hire additional talent out there, would you say that as you head into next year that that number should continue to grow?
spk03: Yeah, our expectation is that our production will grow next year from this year, and it's specifically based on the talent that we've put on. Great.
spk06: Okay. And then you made a comment about the NIM, and I think you said that if you redeployed liquidity from PPP, it would add about 15 basis points. I missed exactly what you said. I was hoping you could repeat that. And then if it was just 15 basis points, kind of what the assumptions are on what that would be, exactly what's going on there.
spk03: Sure. I mean, you know, we're sitting on a lot of cash as the cash comes back from PPP payoffs. And, you know, it's our plan to put those dollars to work, either in loans or we have a purchasing plan of investments, putting it to work in investments. So coming out of cash, even in investments, our expectation is how we deploy those into interest-earning assets over a medium period of time. We're not... buying all of our investments all at one point in time. We're taking advantage of different opportunities in the market as rates move around a little bit into our benefits. And when we take advantage of those, our expectation is as we put that cash to work, our current ex-PPP margin of 320 should elevate to the mid-330s. So that's about 335.
spk05: Okay, that makes sense.
spk06: Yeah. Okay. And then, David, in your prepared remarks, you were talking a bit about some operating efficiency pilot programs. I was wondering if you could just sort of repeat that and sort of elaborate a little bit on some of those programs.
spk04: Yeah. We've been looking at opportunities to utilize technology to increase efficiencies and operational tenets here. We are also looking at other opportunities to manage the expense base, as we always do. But we did some pilot programs this year with some technology solutions where we brought in some people that have some background, things like robotic process automation we're looking at. We did, I'll give you an example, not that you asked for it, but we looked at Reg E disputes, which are highly intense disputes to do the research on, and we found out that the pathway there, we could cut several hours, like 14 hours, out of our processing and really reduce the manual effort there because they were pretty standard operations. So there's things like that that are showing good opportunity or good prospects. We haven't fully laid that all in, but we're testing some of these things, and we're hopeful that those expense kind of saves will help reduce some of the manual efforts and really increase our digitization of process.
spk06: Okay. And kind of as you think through some of those programs and sort of the time frame and the objectives associated with those, would you say that you'd be implementing some of these technology platforms, you know, if they prove to be as effective as that example that you just laid out? I mean, is that something that will be implemented in 2022, and is the objective kind of just to keep expenses flat from where they are today? Are you looking to reduce? How should we think about it from a modeling standpoint?
spk04: Okay, well, I'm going to harken back to something we've talked about for a lot of time. I think the issue continues to be scale for organizations right now, so we continue to look for opportunities to utilize – whatever resources we have, whether it's human talent or whether it's digitization to continue reducing expenses. I would say, you know, when you ask us if we're scalable at $2 billion, we're continuing to push forward with that. So when you model expenses, there's still a lot of headwinds coming at us from an expense build standpoint. We've added talent. So we're looking to offset that, whether it's in terms of operationally, whether it's terms in client-facing technologies. And we're implementing those on a regular basis. It's not just one piece of software. It's process-driven, a lot of it. So when you're asking, should you model, we don't think there's a decline in, let me say it this way, we don't think the pressures that are coming at us from an expense-based standpoint are ameliorated during the next year. We think margins are still under challenge for the next year in terms of the expense basis coming at us. So when you're looking at it, we expect to kind of continue to build expenses the way we always have. We have had some inflation with labor, as John talked about. So I don't think we will model on a global basis a crash of expenses down, but we will continue to try to work every bit of opportunity that we have to continue managing those. Great. Thanks for taking my questions.
spk05: You're welcome. Thanks, Alex. And our next question is from Bryce Rowe of the group. Please proceed with your question.
spk07: Thanks. Good afternoon, guys. Maybe I just wanted to continue the discussion around loan production and some of the elevated levels of prepayments. I'm curious if you're in your pipeline, if you're seeing the pressure from prepayments on the ability to grow the loan portfolio on a net basis, if you're seeing that let up a bit here as we as we're early in the fourth quarter, and kind of what your thoughts might be next year as you look at the level of potential prepayments.
spk03: So, Bryce, this is Don. I think this year was a high point. We don't think it's going to get back to normal. our expectation is going to get back to normal until the latter part of next year so you know I kind of gave some numbers there where our typical over a long period of time for 16 quarters or four years we've been at about 80 80 million dollars in payoffs in a particular year that's doubled this year we see that decelerating gradually through the fourth and first quarter and getting back to normal, but not until the second part of next year. Okay.
spk07: That's helpful. I wanted to ask about the allowance and different components within that allowance. You guys laid out well the hotel exposure and some of the upgrades that you've had and that being a big driver for the reserve release here this quarter. If we're looking at the loan portfolio as a percentage or the allowance as a percentage of the loan portfolio, XPPP, we're down at 117 basis points, give or take. What's your outlook in terms of where that can get to? I think we're at a point now that we're even lower on a percentage basis than we were heading into COVID. So just kind of curious how you think about the way the allowance might might trend going forward here.
spk03: So I think the allowance level, I think some of that is, some of that is we're going to continue, right? We still have another, you know, $50 million in hotel. You know, criticize our expectation on those, what's remaining in there. It's going to improve, and we needed to give this particular group, the remaining group a little more time to analyze and determine their ability to continue to pay P&I, even though they are currently paying P&I. So they need a little more time. So there will be, as those do improve, that will dampen our provision a little bit, as we expect that we'll be taking back some benefit there. As far as the total overall allowance, I think it'll, after the noise is done, I think in the 120 is where we expect that our provision would typically sit. Okay.
spk04: And it'll be based on growth, as we always say, on that.
spk07: Right. Okay, great. I think the other questions I had were asked and answered, so I appreciate your time.
spk05: Thank you.
spk03: Thanks, Bryce.
spk05: We have reached the end of the question and answer session. I'll now turn the call back over to CEO David Naska for a close remarks.
spk04: Thank you. I'd like to thank everybody for participating in the teleconference today. We certainly appreciate your continued interest and support, and please feel free to reach out to us at any time, John or myself. We look forward to talking with all of you again when we report our fourth quarter 2021 results, and we hope you have a great day. So thank you all.
spk05: And this concludes today's conference, and you may disconnect your lines at this time.
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