Evans Bancorp, Inc.

Ladies and gentlemen, greetings and welcome to the Advanced Bancorp second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Maholick, Investor Relations for Evans. Please go ahead.

Thank you, and good afternoon, everyone. We certainly appreciate you taking the time today to join us, as well as your interest in Evans Bancorp. On the call, I have with me David Naska, our President and CEO, and John Connerton, our Chief Financial Officer. David and John are going to review our results for the second quarter of 2024 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 that 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 scc.gov. So with that, let me turn it over to David to begin. David?

Thank you, Craig. Good afternoon, everyone. We appreciate you joining us today. I'll start with a review of the highlights from the recent quarter and we'll then hand it off to John to discuss our results in detail. Despite a dynamic interest rate environment, we delivered strong performance, continuing to push forward to return to historic levels of profitability as the balance sheet grows out of lower yielding rates on investments and loans originated in the recent periods. We achieved growth in our core banking operations and saw notable increases in our lending portfolio. This growth, combined with a stable deposit base and balance sheet optimization efforts in the first quarter, resulted in a net interest margin that exceeded expectations. Additionally, disciplined expense management contributed to the 26% increase in net income on a sequential basis. I'd like to highlight a few key achievements this quarter. Our consumer business banking and commercial teams drove strong loan production as they continue to build a diverse pipeline of high-quality loans, even in a difficult rate environment. In particular, commercial loan production has trended favorably for the first half of the year, producing $44 million in originations, predominantly in commercial and industrial loans, and with a 137 million dollar pipeline in place we anticipate mid single digit growth for the full year our success in this area can be attributed to consistent customer service enhanced cash management focus new products and targeted marketing efforts investments in our teams have also contributed with the additional hires of two cni relationship managers in rochester fully staffing our commercial relationship group there. Our deposit gathering efforts have been solid over the first half of the year with gains in both retail and commercial businesses. This success is a direct result of a comprehensive approach to our customers and a commitment to providing innovative banking solutions that meet the evolving needs of our existing clients and target a new generation of customers. Leveraging technology and process improvements to drive operational efficiencies and reduce costs across the organization remains a top priority. These efforts have driven gains in client engagement and operational efficiencies. As an example, during the first half of the year, we successfully launched electronic signature pads in all our branches, providing a fully electronic account opening experience. This initiative aimed at a better customer experience has improved data integrity and account opening speed, reduced paper consumption, and increased overall efficiency. Our commitment to community banking remains steadfast. We've deepened relationships within the communities we serve through initiatives that support local businesses, philanthropic actions, and targeted programs and partnerships. These efforts foster local development and economic growth. Notably this year, we committed to the Regional Revitalization Partnership, or RRP, a $300 million multi-year collaborative between New York State, local municipalities, and private philanthropic and business partners. The RRP aims to revitalize economically distressed neighborhoods in Rochester, Buffalo, and Niagara Falls by driving economic development through private and public partnerships and philanthropy. This initiative, called East Side Avenues, is a recommitment to an expanded effort begun several years ago in a number of underinvested areas in East Buffalo, which the bank previously supported. Looking ahead, we remain cautiously optimistic about the remainder of the year. We do not see credit issues percolating in the portfolio, and growth prospects appear positive. While recognizing the challenges posted are posed by the current economic environment, we are confident in our ability to deliver performance against these headwinds. Our focus will be on executing our strategic priorities, which include customer acquisition and relationship management to drive loan and deposit growth. Equally important is improving the client experience, optimizing operational efficiency and diligently managing expenses. By prioritizing these areas, we aim to ensure sustainable returns and deliver long-term value for our shareholders, clients, and communities. With that, I'll turn it over to John to run through our specific results in greater detail, and then we will be happy to take any questions. John?

Thank you, David, and good afternoon, everyone. As a reminder, the 2023 comparative period includes business activity relating to the Evans Agency, or TEE, We completed the sale of that business to Arthur J. Gallagher & Company on November 30, 2023. For the recent quarter, we delivered earnings of $2.9 million, or 53 cents per diluted share, which on a sequential basis was up 26 percent from 42 cents per share. This growth was largely driven by higher net interest income and lower non-interest expenses. When compared with last year's second quarter earnings of $4.9 million, The primary drivers of the year-over-year change were lower net interest income and the impact of the T sale. Net interest income of $14.3 million was an increase of $0.4 million from the linked first quarter due to higher average loans and our actions to strengthen the balance sheet at the end of the first quarter. Year-over-year, the change in net interest income reflected higher interest expense given competitive pressure on deposit pricing, which accelerated for most of 2023. Second quarter net interest margin came in at 2.71%, down eight basis points from the linked quarter. While there was some margin contraction, it was favorable to our expectations as we benefited from a strategic focus on optimizing asset mix. I will talk to our NIM expectations at the end of my remarks. The 297,000 provision for credit losses in the recent quarter was due to growth as well as slower prepayment rates, partially offset by improving economic factors. Total non-interest income was up $134,000 from the sequential quarter, driven by higher loan production and resulting fees, as well as improved performance in our wealth management services. That fee income is currently embedded in the insurance service and fee revenue line. The sale of T is reflected in the year-over-year decrease in that line item as well. The decrease in non-interest expenses from the first quarter of 2024 was largely due to lower salaries and employee benefits, which were down 6%. While we have been managing expenses well, the linked quarter did reflect higher seasonal costs, which included the annual resets on FICO and unemployment insurance and the annual payment into our HSA accounts. Once again, the sale of T was the driver of the year-over-year change as non-interest expenses decreased $1.6 million. Our expectation for the bank-only 2024 year expense, excluding T's 2023 expenses, is a decrease between 1% and 2%. Total deposits were flat with the end of the linked quarter, though on a year-to-date basis increased $173 million for 10%. As we previously disclosed, we strategically strengthened our balance sheet during the first quarter, adding $55 million of broker deposits at favorable rates. Also reflected in the increase were seasonal inflows of municipal deposits. From a product perspective, we saw increases across each major deposit category with support from both retail and commercial deposits. Total loans were up 2.5% in the quarter, as net commercial originations were $85.3 million, compared with $36.3 million of net originations in the first quarter. We continue to be selective in underwriting decisions, but are finding high-quality borrowers with opportunities in both CRE and CNI. The mix of growth was weighted towards CNI in the quarter, and we are seeing some increases in line usage following the number of quarters of muted performances. Total loans were up $94 million or 6% year over year, with Cree being up $60 million and CNI up $28 million. As David indicated, the current pipeline is strong and stands at $137 million at quarter end. We expect our current liquidity position to be the foundation that supports expected commercial loan growth of mid-single digits in 2024. We continue to maintain a disciplined approach to credit risk management While we did see a sequential decline in non-performing loans, this was due to a classification change for one loan that was moved to ORE. On the plus side, this was a sound property, and we have a signed purchase agreement in place with a high-quality borrower with no losses expected once the deal closes. Criticized loans were $68 million at quarter end compared with $70 million at the end of the first quarter. We have been successful in managing our deposit pricing strategy to include balancing liquidity with profitability and are confident in our ability to continue to navigate the evolving market dynamics. While the cost of funding continues to rise, we see that the rate of increase decelerating rapidly in some instances, competition lowering rates, which provides a stabilizing NIM outlook. For the third quarter, we expect modest increases in costs as clients continue to move balances from transactional accounts to interest-bearing accounts, and the CD portfolio continues to reprice. Given those impacts, we anticipate our NIM to come down a few basis points to approximately 2.68% in the third quarter of 2024. As funding costs continue to stabilize, we anticipate third quarter to be the low point in this cycle and see the margins start to improve slowly in the fourth quarter and next year. With that, operator, we would now like to open the line for questions.

Thank you. Ladies and Chairman, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of Christopher O'Connell with KBW. Please go ahead.

Hey, good afternoon. Good afternoon, Chris.

So great loan growth this quarter, a nice rebound and on track for the mid-single-digit growth. Can you go through the origination yields that you're seeing nowadays in the commercial book?

Yeah, I think, you know, kind of our offering rates, depending on the type, you know, lines are going for prime plus. And then a longer-term commercial and commercial real estate are going, you know, somewhere in the 7.5% and above.

Got it.

And as far as the overall portfolio, just remind us how much of it is repricing with short-term rates, and then how much of the portfolio is set to reprice or mature in the back half of the year?

So the variable rate portfolio is around $300 million.

Um, and as far as I'd have to, I'd have to get that number for the final six months of what the maturities or what the repricing would be.

So I'd have to get back down.

Got it. No problem. And then, you know, on, on the Muni seasonality, it seemed to hold up a little bit better, uh, you know, into this quarter. Um, how are you thinking about the seasonality in the, in, you know, the final two quarters of the year?

Yeah, I think we're higher because we've garnered some new customers, but the seasonality, just as far as from a graphical perspective, we don't expect any difference in that. Our low point will be September before it again goes up, and then it'll be, again, a low point, the very lowest point in the year is December. We expect traditional seasonality, but maybe at a slightly elevated level.

Yeah, they'll spend into September. And then in October, the bills go out and you start repopulating the balances.

Okay, great.

And then on the CD or on the deposit side, you know, the CD costs, it seems like, you know, are starting to come up, you know, towards October. you know, market rate levels. I mean, what are you guys, you know, generally offering, you know, on the CD book currently? And have you tested the waters at all on kind of bringing that down from the highs?

We have. I think, you know, probably last quarter we were, and the market was five and above. We're still getting some outside competition that's doing that and some avenues. But we're, ourselves, we're at around 4.5%. Seems to be competitive, and we're holding that liquidity with that.

Got it. So is most of, like, the remaining pricing, I guess, on the funding side, just, you know, from, you know, the lingering commercial customers, kind of more one-off rates than the broader book?

Yeah, and I think we've, you know, we've seen that plateau out. But we, you know, there will be, there will be some impact from what kind of reprice in the second quarter. And then there still is a little bit of that happening in the third quarter, obviously not anticipating any fed movement, which might, you know, certainly improve that because we won't, you know, that that'll probably move the competition down. Yep. But our expectations don't, we don't consider any fed movement. That's, you know, our NIM expectations are, are just our current trends in our pricing and what we're seeing our customers do, their behavior. And to your point, their behavior is we're seeing less repricing of our current savings and transactional accounts, our NAL accounts, than we have in the past. So that's why we're indicating that. it's going to be this kind of a low point in the third quarter.

On top of which we've had growth across all segments. So there has been commercial checking. There's been retail checking. We're seeing not just CD growth here.

Great. And as you guys are looking in towards the back half of the year and we potentially get closer to some Fed funds cuts, how are you thinking about how the NIM will react, you know, either to a single 25 basis point, you know, Fed funds cut, or just in general, the cadence on a, you know, in a down cycle in rates there?

Just the math on our balance sheet, Chris, is, you know, it should be that 25 basis points should be down. How the market reacts and the pressure of And the pressure directionally, it puts on the local market pricing. It's probably a bigger unknown. So if that is more of a positive and we get some traction on ability to price down some of our CD pricing and some of our savings, that would be helpful. But just our expectation, even 25 basis points should be more neutral than positive or negative.

Got it. And that's... the short end, right? Not the parallel.

Yes, the short end. And you also have two fairly large competitors here with the two regional banks that control the market. So as John said, the vagaries of how they price are going to impact what we do, but generally they'll hopefully be a little conservative, rates go down, but it's not going to have a monumental impact.

Great. And then, you know, the fees have come in a little stronger the past couple quarters, you know, I think specifically on the other fee line. Is that anything MSR related or anything in there that has been holding that up, or is that a pretty good run rate to go forward with?

know other can be a little clunky um it's probably a slightly elevated but not by a significant amount you know there's a lot of there's a lot of different it's a true other there's a lot of things that can pop up and move it around loan fees are in there um but you know it's probably slightly elevated but not by a significant amount great um and then on the expense side i mean you know very

good quarter and, and, you know, great job bringing everything down this quarter based on the guide. Is it right to read that a little bit, you know, more investments in the back half of the year and just any color on kind of, you know, what you guys have planned, uh, either on, you know, the technology side or, or personnel in terms of, uh, you know, investments going forward.

I think a couple of things, I think we have made investments obviously in people, uh, I think the back half of the year we look to maintain our staffing. You know, there's still some change going on, but I don't think there's a lot more investment in lending teams, as I mentioned. In terms of technology, we've been investing all along to try to get efficiencies, but that should eventually be to our benefit in terms of expenses, not our detriment. And we have made the heavy investments here. We're trying to reap some of the benefits of the efficiencies here going into the back half of the year and into next year.

Great. And then on the credit side, any...

any additional color that you can provide on the Oreo that is set to sell and set to sell, you know, and no loss, but just, you know, what type of loan or, you know, any thing about the situation or what happened there?

Yeah. I mean, it's, it's been a, it's one of the larger loans that have been in non-performing for a period of time. It's one of really a good property that just never got the operators needed to get changed out. It was a hotel. And we got some really good operators going in there with some good backing and some good wherewithal. And the property itself is turned around and is starting to perform. So the new owners are excited to be in there and we're excited to have them.

Got it. And so did that whole 6.9 balance come out of NPLs this quarter?

It did. It did. So you don't see a direct reduction in it because you'll see when our queue comes out, we do have a couple 90 days and still accruing that are just having delays in getting to close. And so, no, I would suggest that it's not an increase in MPLs, but by classification, those 90 plus and accruing go into that number.

Otherwise, we'd be flat.

Yeah. And anything else that you're seeing, you know, of concern at all within, you know, from the credit perspective on the book into the back half of the year here?

Nothing that we're seeing. You know, we're being diligent in looking at all of our credits that are coming up to refinance. We're looking out ahead. seeing what those businesses look like at the newer rates. And we run those numbers and we haven't really seen any deterioration in those debt service coverages at new rates. And we haven't really seen any delinquencies that have increased. It's pretty much working on the stuff that we do have in our NPLs, such as the ORE that we're talking about, and getting those to better performing.

we haven't seen any negative trends. Got it. Helpful. And then, um, that's for me is just, uh, what's a good go forward tax rate. Uh, 22 is a 22 and a half is a good, good go forward tax rate. Great. Appreciate the time. Nice quarter. Thanks for taking my questions.

Thanks Chris.

Thank you.

Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and one. As there are no further questions, I now hand the conference over to David Nazca for closing comments. David.

Thank you. And thank you all for participating in the 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 2024 results. Hope you have a great day and thanks again for your interest.

Thank you. The conference of advanced band crop has now concluded. Thank you for your participation. You may now disconnect your lines.