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spk04: Greetings. Welcome to the Evans Bancorp fourth quarter fiscal year 2022 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'll now turn the conference over to your host, Craig Mahalik. You may begin.
spk07: Thank you, and good afternoon, everyone. Certainly appreciate you taking the time to join us. as well as your interest in Evans Bancorp. On the call, I have with me here David Naska, our president and CEO, and John Connerton, our chief financial officer. David and John are going to review the results for the fourth quarter and full year of 2022 and provide an update on the company's strategic progress and outlook. After that, we'll 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 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 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 at the scc.gov. So with that, let me turn it over to David to begin. David.
spk01: Thank you, Craig. Good afternoon, everyone. We appreciate you joining us today. I'll start with a review of the past year and then hand it off to John to discuss our results in detail. I'm once again proud to report on the outstanding efforts and responsiveness of our teams in successfully adapting to rapidly shifting economic conditions and environments during 2022. Evans delivered solid fourth quarter results with $6 million in net income, and 14% annualized commercial loan growth, which added to strong performance for the full year of $22.4 million and 9% commercial loan growth ex-PPP loans. These results approach prior year record earnings despite a significant swing in our provision for loan losses and having to replace nearly $9 million in fee income received in 2021 from extensive participation in the Paycheck Protection Program. As you know, the economy opened 2022 with tremendous liquidity from government stimulus, remaining at financial institutions, and very little opportunity to invest this liquidity in the extremely low interest rate environment. Given inflationary pressures and macroeconomic challenges from ramping supply inputs, such as labor, oil, building supplies, and housing, as well as the Russian invasion of Ukraine, The Fed embarked on an historic level of interest rate tightening that raised short-term interest rates 425 basis points in seven actions taken from March to December. This unprecedented level of tightening resulted in an inverted yield curve, which has historically indicated potential recession. Margins expanded as rates for loans increased, and deposit costs stayed modest until late in the third quarter. At that point, Competitive options mirrored rate increases and money began to flow to alternative investments such as U.S. Treasuries and higher rate deposits, putting pressure on banks to match or lose funding. On the asset side of the balance sheet, loan yields rose and outstripped the levels of deposit increases for a couple of quarters until interest rates reached a level that challenged CRE projects and residential mortgages. Overall, the bank successfully weathered and performed in this environment by delivering record commercial loan originations of $95 million ex-PPP at significantly improved rates, driving the yield on earning assets for the loan portfolio to 4.88%. In relation to non-interest income, it was a solid year in our insurance business with 6% commercial insurance growth and 2% personal lines growth. offsetting the loss of revenue from the discontinued operations of our insurance claim service business. We saw strong account retention, price hardening, and a good level of new business attraction. While we continued to make investments in strategic focus areas, we also worked hard throughout the year to pursue efficiencies and deliver disciplined expense management to enhance returns. This included further utilization of technology, to refine back office processes along with greater customer facing solutions centered on speed, flexibility, and efficiency. We completed our branch optimization project in the third quarter, which included consolidating two branches in the southern area of our footprint, closing a branch in Rochester, and converting a downtown Buffalo location to a loan production office. The anticipated employee savings were realized through normal attrition, The merger of the two branches has been very successful with excellent morale amongst the team as the combined larger branch is more efficient. Importantly, there has been no material customer defection as a result of these changes. Additionally, we have received a purchase offer for the closed location in Derby. The net result of our efforts can be seen in the efficiency ratio, which was 62.9% in the fourth quarter, which is our lowest level in more than 10 years. This past year was also our largest yet on the philanthropy side, as we made $400,000 in total charitable contributions. This included $100,000 to the Buffalo Together 514 Community Response Fund, established in collaboration with local funding organizations, 100 local and national foundations and corporations, and over 2,000 community members after the mass killing of 10 innocent people in a racist attack in East Buffalo. The fund was created to address systemic and structural issues related to racism and a lack of investment that harmed communities of color. Of our total contributions last year, nearly 80% was directed towards underserved communities and organizations serving low and moderate income residents. Another area of focus and where strides were made this past year were our efforts and commitment towards inclusion, diversity, equity, and awareness. The bank appointed a Chief Diversity, Inclusion, and Community Development Officer responsible for driving the overall development, implementation, and communication of our inclusive strategic plan. Overall, a 13% increase in ethnic minority associates was realized through concentrated recruitment efforts. As part of our inclusive culture, we continue to achieve pay parity between genders for those who identify as male or female and across race and ethnic backgrounds. We have also been successful expanding our supplier diversity program to ensure that minority and women-owned businesses were bidding on and securing business from Evans and are ahead of our five-year goals in all initiatives. The bank has continued to focus on its return of capital to shareholders and total shareholder return. For the year, dividends totaled $1.26, which was up 5% over 2021 and equated to a yield of 3.2%. As we enter 2023, the focus will continue to be on loan growth, customer acquisition, and relationship management, along with optimizing operational efficiency and expense management to deliver returns. This will play out against expected headwinds of margin pressure caused by rising interest rates and pricing competition and potential recessionary effects impacting the economy and our customers. We believe our value lies in our community-based, customer-centric model, which allows us to support, serve, and grow our customer base in all economic environments. 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. John? Thank you, David, and good afternoon, everyone.
spk02: For the quarter, we delivered earnings of $6 million, or $1.09 per diluted share, which was up 3% from the sequential third quarter in last year's fourth quarter. The increase from the 2022 third quarter was largely due to a reduced provision in lower non-interest expenses, partially offset by lower non-interest income. The change from the prior year reflected lower non-interest expenses partially offset by an increase in provision. Full-year net income reached $22.4 million, or $4.04 per diluted share, compared with the record level set in 2021. As David mentioned, our annual results were strong considering the higher provision compared with the release of allowance during 2021, along with the significant level of PPP fees during the prior year period. Net interest income was up slightly from the sequential third quarter as higher interest income due to federal funds rate increases of 125 basis points was largely offset by an increase in interest expense given the cost increase of interest-bearing liabilities due to competitive pricing on deposits. The decrease in net interest income since last year's fourth quarter reflected the benefits that impacted the prior year. Those included $2.4 million of PPP fees 800,000 of amortization of fair value marks on acquired loans, and 700,000 of interest recognized from the payoff of non-accrual loans. The year-over-year increase in provisions was largely due to strong loan growth. Also reflected was an increase in criticized loans and an increase in the specific reserve for a smaller commercial loan previously in non-performing. Our balance sheet benefited from rising interest rates and given recent Fed actions, we saw a five basis point lift in net interest margin in the fourth quarter to 3.77%. I will talk to our NIM expectations at the end of my remarks. Non-interest income was $4.5 million in the quarter, down approximately 5% from prior year fourth quarter, primarily due to an insurance claim from BOLI and a reversal of an earn-out relating to a small insurance agency acquisition in the other income line, each recognized in the prior year. Insurance, which is the largest contributor within the category, was up 5% year-over-year due to higher premiums and new commercial clients. Insurance was down from the link quarter largely due to typical seasonality and commercial lines insurance commissions. As we mentioned last quarter, 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 levels. We did implement changes during the fourth quarter, which resulted in the reduction in fees of approximately $100,000. The full year impact for 2023 is estimated at $400,000. Total non-interest expense decreased 6% or $900,000 from the sequential third quarter and was down 1.4 million or 9% from last year's fourth quarter. The primary driver over both comparable periods was lower salaries and employee benefits, which reflects prudent expense management efforts our efficiency initiatives, and lower incentive accruals. Our expectation for expenses run rate for the full year is between 2% and 3%. Turning to the balance sheet and comparing since last year end, investment security balances were up $62 million, and total loans increased $100 million, or 6%. Excluding decline in PPP loans, total commercial loans increased $95 million, or 9%. PPP loan balances, which are included in commercial and industrial loans, were less than $1 million at the current year end. Looking at the recent fourth quarter, total loans increased $46 million. Of that, commercial loans grew 3.6% or more than 39 million net of PPP, and net originations were $71 million. That compares with 68 million of net originations in the linked quarter, which continues to be higher than last year's average originations. We have seen a slowdown on commercial real estate side given the rising rate environment, whereas commercial industrial has strengthened and is making up the bulk of our pipeline, which stood at $69 million at year-end. We expect total commercial loan growth to be between 5% and 7% in 2023. Our credit metrics remain sound, with a slight decrease in non-performing loans on a sequential basis and low charge-offs in the current quarter. Almost 60% of our hotel portfolio has been upgraded or paid off, leaving $30 million in criticized status at the end of 2022. While trends for this industry have improved, a change in status for the remaining criticized hotel credits is dependent on continued positive payment performance. Total deposits of $1.77 billion decreased $102 million, or 5%, from the sequential third quarter, and on a year-over-year basis were down 9%. Deposit betas began to accelerate during the quarter, and some of our more sophisticated commercial and municipal clients with larger balances have moved their excess funds to other investment options. Of the decline in deposits, approximately 60% was due to less than 10 commercial and municipal customers. These customers continue to be operating clients of the bank, but have moved excess funds to treasuries. We have maintained consumer funding balances with the use of competitive pricing of our term products. We will be proactive with pricing and maintain competitive rates in our markets. We expect these market conditions and pricing pressures will have an impact on our margin for the first quarter and full year period next year. The fourth quarter was a high point in this current interest rate cycle, and we expect our NIM to experience approximately 10 basis points of compression in the first quarter of 2023. The bank does have $350 million of variable loan portfolio and expects approximately an additional $200 million of maturities and repricing on loans and investments in 2023 to benefit from two additional 25 basis point increases from the Fed including the one at yesterday's meeting. These are expected to stabilize the margins for the remainder of 2023. With that, operator, we would now like to open the line for questions.
spk05: At this time, we will be conducting a question and answer session.
spk04: 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 start keys.
spk05: And our first question comes from the line of Alex Turtle with Piper Sandler. Please proceed with your question. Hey, good afternoon, guys. Good afternoon, Alex.
spk06: I wanted to start, I guess, kind of where you're ending your comments, John, on funding. And I'm just curious, you know, after the declines that you saw in the fourth quarter attributed to the larger customers, if you think that that's kind of the extent of your, quote, unquote, at-risk larger chunkier customers, or if you can give us some sense for, you know, what you're seeing in the first quarter, just, you know, thoughts around, you know, the different ways to support the loan growth.
spk02: Yeah, that's kind of what we're seeing. We kind of went through more of that larger flow out probably in the latter part of the fourth quarter. And for the first quarter, we've seen kind of stabilization of that flow out. And we are, obviously, our pricing is keeping the consumer side. On that commercial side, we think the most sensitive have moved away. And we think that... As far as, you know, there is some seasonality on the municipal side. We'll see some of that come back in the first quarter as the towns receive their tax receipts. But we've seen the larger, again, there was only, you know, a very small handful of those customers, and we, you know, we've kind of ring-fenced them.
spk06: Okay. Would you expect in the first quarter to see your average borrowings, or I guess your total borrowings increase?
spk02: Our total borrowing should actually come down a little with the municipal dollars that will come in, Alex. So we would expect it to come down slightly.
spk06: Okay. And can you talk a little bit about the pricing that you're seeing on some of that new CNI paper that is in the pipeline?
spk02: Yeah, most of our CNI paper is coming at our cost of funds plus $250 or so. So we're keeping our spreads.
spk06: which you know at this point is anywhere six and a half and above okay I'm just curious I guess in terms of some of the moving parts in fee income you know we at least we read about from where we are some pretty large snowstorms up in the Buffalo market I know that historically those types of things have impacted your insurance revenue I'm just curious if that's something that you think we might see in 2023 or be prepared to see in 2023 or any other thoughts around whether or not the 5% growth that we saw year over year could continue into the new year.
spk02: Yeah, so you kind of referred to some of the claims adjustment that we had with our claims adjusting company that we went away from last year. So we don't expect to see any spikes due to kind of the weather-related issues, but we still do see that the market's hardening from a premium perspective, and we do expect that our new business growth should be consistent with what we experienced this year.
spk05: Okay, great.
spk06: And then on the overdraft, I think last quarter you said the total year effective would be around $500,000, so you're now saying that's around $400,000, or is it $300,000 more than...
spk02: It's $400,000 for the full year 2023 versus 2022. Yeah, we hit $100,000 last year. We hit $100,000 in this quarter, so it's just the difference between that.
spk06: Okay, so we're going to be maybe a full quarter's impact if you compared it to a year ago would be around $125,000?
spk05: Yes. Okay, great. Thank you for taking my questions. Thanks, Alex. Thanks, Alex. All right, next question comes from the line of Chris O'Connell with KBW.
spk04: Please proceed with your question.
spk05: Hey, good afternoon.
spk03: So, I wanted to circle back to the margin discussion. You know, it seems like, you know, the deposit flows are, you know, starting to stabilize in the first quarter. Can you talk about, you know, what you guys are, you know, putting out there on deposit pricing in order to, you know, keep your current customers and, you know, gain new customers and, you know, how you see that progressing over the next couple of quarters?
spk02: I think on the term, Chris, so CDs from a consumer perspective, that's anywhere between three and a half and 4%, depending on what market we're in. I do think then on the savings side, where we're talking about commercial savings and, we can utilize kind of our geographic footprint a little bit where we don't have some business can be a little more aggressive and go with some promotions on business accounts that could be as high as three and a half percent to attract new business.
spk05: Got it.
spk03: And just, I mean, given, you know, the margin guidance, you know, for, you know, down, you know, 10 bps in the first quarter and then stable, I mean, given where your deposit costs are now, you know, at 51 basis points and where those new deposits and, you know, deposits are repricing, you know, throughout next year. I would think given the variable loan portfolio that the first quarter should be the least amount of impact and then there should be pressure thereafter as the deposits continue to get repriced. Can you just talk about why that may not occur and I guess what goes into the margin outlook in the trajectory after the first quarter?
spk02: Sure. I mean, the difference between the fourth and the first quarter is, you know, just the level of borrowings that we had spiked at the end or during fourth quarter. But I think, you know, and it's the categories of where we had some dollars move out so that, you know, the fourth quarter had some demand deposits move out. in particular some of our larger clients. So that's going to have a kind of an oversized impact from fourth to first quarter. And then we do expect that stabilization. So we've said it in the past, you know, the last cycle we had about a 37 to 39 beta, and we still expect that. So if you kind of calculate that through, you know, as the year goes through here, we'll get, you know, we get closer to a 2% cost of interest-bearing liabilities. with an average somewhere between 165 and 185 during the year.
spk05: Okay.
spk03: And, you know, I guess, you know, but still, you know, given that the deposits are going to be repricing, you know, throughout the year, not just in the first quarter, and a variable portfolio is going to, you know, stop repricing after the first quarter for the most part. How does that fit with the flattening trajectory?
spk02: Well, I mean, we have some funding that's going to come in in the first quarter and stick around. So fourth quarter is a low point, and the beginning of the first quarter is a low point. So we expect our borrowings to shrink and reduce. And so that's kind of the first quarter is kind of oversized from that
spk05: Okay, got it.
spk03: And as far as, you know, cash balances, it's still pretty low here at like 6 million or so. Is there, how do you guys see that, you know, progressing over the next couple quarters?
spk02: I think our cash balances will stay fairly tight. because any opportunity we can, we'll pay down on our borrowing, which are more towards the short end at this point.
spk05: Okay, got it.
spk03: And for the expenses, the outlook's a little bit better, I think, than where it was last quarter. Can you just talk about, you know, any seasonality that you expect in the first quarter versus the remainder of the year? And maybe where, you know, your FDIC costs, you know, will start off in the first quarter given the higher assessment rate?
spk02: Yeah, so that 3% does include a higher expected FDIC rate. The biggest impact is on our expenses that are kind of holding down in relation to prior year is is our expectation in our salaries and our expected incentive that we'll pay out just based on the levels of goals that we have and the payout that were assumed. So the fourth quarter is actually kind of a good run rate moving forward. And then with that 2% to 3% kind of impact as the quarters move on, link quarter to link quarter.
spk05: Okay, great. And what's a good tax rate for next year? $24.5 is a good tax rate. Great.
spk03: And then lastly, credit metrics all around seemed great this quarter. Can you just talk about, given the moving rates and kind of overall economic activity, know what you guys are seeing in your market areas and within your portfolio and you know maybe you know where you're pulling back on or see you know additional risk uh as well as uh you know what the critical factors are uh you know to keep the hotel portfolio criticized uh you know coming down over the course next year uh
spk01: I'll answer that one here, Chris. A couple of things. One is in the marketplace, we're still seeing strength and good credit, especially in the manufacturing and the CNI side. Commercial real estate has slowed down with the increase in rates. Mortgage, obviously, has really tightened up in terms of slowing down. So from an activity standpoint, that's kind of what we're seeing. We've offset commercial real estate growth Last year, we've offset that with more C&I expectation this year. Obviously, when you're in industry, whether it's service or manufacturing, if we head into a recession here, there could be impacts there. We're watching that. At this point, credits are fairly benign. We're seeing that across the industry, and we're feeling the same way. You're hearing that, I'm sure, across all your discussions here. We are trying to stay very close to our customers, though, because if we get into a recessionary environment, demand's going to matter. Most of the people have worked through the supply chain issues that they had, and that actually is resulting at least in the manufacturing side improving. We're not seeing any deterioration at this moment on a credit side. So I think we're feeling pretty constructively positive in terms of going into this. We're not chasing it. Certainly, we always talk about that. We maintained our credit standards. We're not loosening those. John talked about the margins earlier. We are getting paid for the risks we're taking. We're not shrinking too much on the margin here. I think overall we're feeling okay going into what we're seeing right now, and we're watching it.
spk02: The only thing I would add, Chris, we're going to be on CECL in the upcoming year, and the provision will be a little more at risk with forecasts on the economy, so that's something to kind of consider.
spk01: I guess you also asked a question about the hotels. I'll go back to that. You know, 60% of the hotels have come out since we originally criticized them. You have probably 30 million still left. Of those, one of them will stay in there, you know, call it $8 to $10 million. The rest of those we are continuing to watch for performance at their given cycles, you know, different prime periods. They are performing. We don't see anything that will preclude them from continuing to repair themselves and come out over the next period of time.
spk05: Great. And for the CECL impact, you guys have an estimate for that yet?
spk02: Well, yes. We'll have some disclosures in our K when it comes out in the beginning of March.
spk05: Okay. Got it. All right. Thanks, John. Thanks, Dave. I appreciate you taking my questions. Thanks, Chris. And we have reached the end of the question and answer session.
spk04: I'll now turn the call back over to management for closing remarks.
spk01: Thanks, Shamali. I'd like to thank everyone for participating in our teleconference today. We certainly appreciate your continued interest and support as we go through the years. 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 first quarter 2023 results, and we hope you have a great day.
spk04: This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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