Evans Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Greetings, and welcome to Evans Bancorp Fourth Quarter and Full Year 2020 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host and Investor Relations for Evans Bancorp, Deborah Pawlowski.

[Deborah Pawlowski:]

Thank you, Omar, and good afternoon, everyone. We certainly appreciate your taking the time today to join us and your interest in Evans Bancorp. On the call, we have David Nasca, our President and Chief Executive Officer; and John Connerton, our Chief Financial Officer. David and John will review the results of the fourth quarter and full year 2020 and then we will open up the call for questions. You should have a copy of the financial results that were released today after the markets closed. If not, you can access them on our website at www.evansbank.com.

[David Nasca:]

Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us for the call today. As goes without saying, 2020 was a singular year unlike any other, with monumental upheaval that tested the fortitude and resiliency of our organization. I'm most proud of what our entire Evans team achieved. We responded rapidly to support the people and businesses in our region to help them navigate the many challenges presented by the pandemic. At the outset of this disruption, we quickly adjusted to a new remote work posture to protect our associates, clients and the community. In fact, by the end of last March, we had over 96% of our nonbranch staff working remotely. While we have had some reintroduction to the office environment, we are predominantly operating in a remote stance and will through at least this spring. Given the multiple changes to guidelines for operating safely, the retail delivery channel has also seen significant impact, alternating between branches being drive-through, mobile and ATM-only to being open with appointments-only to being fully open with safety protocols and equipment. To facilitate business and continue to serve clients, a number of new processes and technologies were employed throughout the bank as well as new customer-facing tools such as online document signing and then commercial lending platform tools, secured communication platforms and Paycheck Protection Program bulk application submission software, to name a few. From an industry perspective, intense pressure was put on net interest margins as the Fed lowered rates to near 0% to address business challenges and shutdowns occurring as a result of the pandemic. Liquidity flooded the system due to PPP, and there were few opportunities to redeploy profitably. In addition, industry-wide income was negatively impacted in a material way by the holding of significant reserves in response to macroeconomic trends and concerns including unemployment, reduced spending and business slowing to levels never before seen. During the year, while COVID significantly impacted the financial industry and operations, we were able to pursue execution of our strategy through the flexible and committed efforts of our team to position the company for long-term growth. This included a number of significant achievements.

[John Connerton:]

Thank you, David, and good afternoon, everyone. Net income was $6 million or $1.11 per diluted share in the fourth quarter compared with $3.7 million or $0.75 per diluted share in last year's period. The increase reflected higher net interest income, largely due to the FSB acquisition, and fees earned in connection with PPP lending. Net income also increased over the trailing third quarter as the period had an elevated loan loss provision to reserve for well-defined weakness in the hotel portfolio and contain remaining merger-related costs. Net interest income increased $789,000 or 5% from the third quarter of 2020 and $2.6 million or 28% from the prior year fourth quarter. The increase from the sequential third quarter resulted from an acceleration of the amortization of PPP loan fees as we recognize the first PPP loans to be forgiven by the federal government. This acceleration resulted in approximately $400,000 of additional income during the quarter. We did release $126,000 of allowance in the quarter, largely as a response to current positive macroeconomic trends such as unemployment. Net interest margin improved to 3.38% in the fourth quarter, up 19 basis points over the linked period, largely due to the accelerated PPP fee amortization and reduced interest expense as we continue to reduce rates on certain deposits. The 29 basis points decline from last year's fourth quarter reflects the Federal Reserve's decrease of the federal funds rate by 150 basis points early in 2020 and changes in the mix of interest-earning assets, including greater interest-earning cash – interest-earning cash balances, PPP loans and residential mortgages from FSB. We have a strong commercial pipeline in the first quarter of 2021 and, additionally, as of today, have received 544 second-round PPP applications amounting to approximately $64 million. Both these sources of originations should result in continued expansion of our margin between 5 and 8 basis points over the next couple of quarters as excess cash is deployed into higher interest-earning assets.

[Operator:]

And our first question comes from Alex Twerdahl with Piper Sandler. Please state your question.

[Alex Twerdahl:]

Hey, good afternoon guys.

[David Nasca:]

Good afternoon, Alex.

[Alex Twerdahl:]

First off, just wanted to talk about expenses for a minute. I know there's some stuff from the FSB acquisition that – and you'd cited some higher incentive compensation in the expense line for the fourth quarter. But maybe just get us – help us get a sense for how much of the fourth quarter might have been inflated by some of the higher incentive comp and sort of what the right starting point is for 2021 would be very helpful? Thanks.

[John Connerton:]

Sure. I think the big impact on the expense line is in the salaries. And comparing the $9 million or so for the fourth quarter versus the linked quarter of $8 million, it's really – the impact there is the third quarter was depressed from the – because we took a benefit in the third quarter by adjusting down the incentive. And then in the fourth quarter, we actually had its more typical incentive period because what we did in the third quarter is as we went through the year; it was evident that we weren't going to make our bonus as it was calculated. But then in the fourth quarter, management working with the Board determined that with the efforts that were made, we would adjust back up. So there was a timing – time frame. So the run rate of the fourth quarter is more of the appropriate run rate of around $9 million.

[Alex Twerdahl:]

Understood. Is there anything else either in the fourth quarter that might not be super obvious in expenses that wouldn't recur into 2021? And then also just in terms of cost saves and things like that and synergies from the transaction, are they all at this point recognized and reflected in the expense run rate?

[John Connerton:]

Yes. I think the remaining – I mean, I think the run rate in the fourth quarter is pretty indicative of our operating run rate that's going to be going forward. I mean, there'll be – obviously, in first quarter, we'll have some increases due to merit increases that we typically have every year. But I think the expenses and the cost saves that we have are baked.

[Alex Twerdahl:]

Understood. Thank you. And then in terms of the PPP, just for my notes here, the amount that was actually forgiven in the fourth quarter, I'm not sure I saw that in the press release. Can you just tell us what that was?

[John Connerton:]

Sure. It was $17 million was forgiven in the fourth quarter.

[Alex Twerdahl:]

Okay. And then maybe you can talk, David, a little bit about the loan pipelines. I know you mentioned that the commercial pipelines were strong going into the first quarter of the year. Do you expect that to translate to net commercial and loan growth in the first couple of quarters of ex-PPP? Or are you seeing the PPP cannibalize some of the loan growth that you normally would have put on earlier in the year?

[David Nasca:]

Let me say it this way. I'm optimistic that the pipeline is indicative of better growth going forward. I don't think that PPP will cannibalize that growth. When I was talking to the lending guys, one of the – and girls, one of the things they said was last year when PPP started, that was all that was going on. This year, we got our regular day job going on as well. So I don't think that there's cannibalization that's going to happen or shutdown there. I think there's people that have held off as long as they can, and there's a need to do their business here going forward.

[John Connerton:]

So Alex, just to add to that, I think our pipeline rate would be indicative of growth, as David said. Obviously, caveating that if roll-off and refis are – continue on from last year, that – it might be somewhat muting the growth that we would see based on the pipeline originations that we have in-house. But we think just the originations themselves would be indicative of historical growth.

[Alex Twerdahl:]

Great. And then just final question for me. On the margin, if you can just – the 5 to 8 basis points that you cited of expansion in the next couple of quarters, is that kind of the all-in margin, inclusive of all the PPP forgiveness, accelerated forgiveness fees and things like that? And then if you kind of take the PPP acceleration away, how do you think the margin and NII is set up over the next couple of quarters, just given sort of what you're seeing on new loan rates and opportunities to still lower cost of deposits and liabilities, et cetera?

[John Connerton:]

I think probably half of that that is – those – that acceleration is baked into my estimate of where we think we're going to be going. I'd say half of it is – half of that benefit is – or more than half is due to the accelerated fees. But otherwise, I would say is our core net interest margin, excluding PPP fees are – is stabilized to slightly up.

[Alex Twerdahl:]

Great. Thanks for taking my questions.

[David Nasca:]

All right, Alex.

[Operator:]

And our next question comes from Bryce Rowe with Hovde.

[Bryce Rowe:]

Thank you. Good afternoon. It's good to talk to you.

[David Nasca:]

Hey, Bryce.

[Bryce Rowe:]

Hi. Just wanted to maybe talk a little bit more about the PPP and certainly appreciate some of the commentary you gave around that. So you said that you expect the forgiveness of, I guess, round one, 90% to recur this year. Can you give us a sense for kind of what you've seen here so far in 2021 in terms of that pace? And is there some chance that potentially the pace of forgiveness may be a bit faster than what you forecasted here?

[David Nasca:]

Bryce, I'm going to start with this. This is Dave Nasca, and I'm going to let John get more technical. I don't want to be too wonky, but we amortize those fees and income over the expected life of the loans. So there was an expectation of those coming back at a fairly level rate, and those are in there. What we've seen in the first quarter – well, the first quarter, we're in February 4 here. But what we've seen thus far is a little bit of a hold on acceleration right now as people are coming in for their second round of PPP, for example. So our attention to folks or their attention to getting forgiven right now, when they have time to do that, has maybe been diminished as they focused on getting their second draw to say. So that's the high-end wonkiness of it. I'll let – if you wanted more detail, John can provide a little more on that.

[John Connerton:]

Yes, I would say the only thing I would add to that is, to David's point, I think there's been a little bit of a halt on our customers' request for forgiveness just because they're focused on their second round, some of – a lot of them are focused on their second round of PPP. And so we would expect that probably in the latter part of the first quarter and then second quarter and then certainly third quarter would probably be the time where that 90% is fully done.

[Bryce Rowe:]

Okay, that's helpful. And so in terms of the second round, you highlighted the number of apps that you've taken – any sense for, relative to the first round, how much you might deploy here? I think we've heard from other banks throughout earnings season that the range is somewhere between, I don't know, 35% and 60% of the first round balances. Does that feel about right for you all?

[John Connerton:]

Well, I will give you a couple of statistics. And then 50% is sort of in the average there, and that's probably where we feel it is. If you look at it, we did 1,933 loans last year, and we did $203 million. Thus far, we have accepted 500 applications and $64 million. We think that, that will continue going. But we – the number that we targeted probably half of the first round, so that would be 900, 1,000 applications maybe and maybe – I don't know what the dollar amount is, it depends. But that 50% is probably a good thumbnail sketch of where we think we'll be.

[Bryce Rowe:]

Okay, okay. That’s helpful. I wanted to shift to the deposit funding side of things now. Just maybe a follow-up on Alex' question. You've seen – just wondering if there's some opportunities to continue to remix the deposit portfolio away from CDs or time deposits. Just kind of wanted to get a feel for if there's any level of wholesale broker-type funding in that deposit portfolio, and if so, what that level is. And then in terms of kind of the rates, where are the rates today within the transactional-type deposits as well as the time deposits?

[John Connerton:]

So, I guess I would kind of take it in a couple of pieces. First, on our CD portfolio, we have a de minimis amount of brokered CDs. But we do have – when we project out and we look at our CD portfolio, we do still see some ability to continue to price down that portfolio. And what we've been experiencing is probably a 60% retention rate and a much lower rate, obviously, is somewhere between 5 basis points and 15 basis points that it’s coming on at. And then what's happening with those funds is – most of it's not leaving our bank but going into more liquid transactional accounts, savings and NOW accounts, which are again down into the single digits that the rates are at, that we're offering on those products at this point.

[Bryce Rowe:]

Okay, okay. And then it goes along with what the margin "guidance" was in terms of maybe seeing some stability here if you are able to reduce this funding cost, that's good.

[John Connerton:]

Yes. I think the other side of that obviously – I'm sorry, Bryce. The other side is our assets, obviously, are continuing to reprice down. So we're hoping that – our expectation is those two will offset each other, benefit on one side on the cost of funds. And unfortunately, the rates are hitting us on the yields from the loan perspective. So but…

[Bryce Rowe:]

Yes, I totally get it. And then in terms of the criticized loans, it looks like the increase was primarily just tied to the two hotel loans that you cited in the press release and in your comments?

[John Connerton:]

Yes, exactly. We've been watching that portfolio. We had – we – it's really about the individual credits and the operators. And we think these operators probably had issues that, going into the pandemic, are probably more evident now. And we feel that those are the two out of our portfolio that have shown probably a longer-term systemic problems, and we've decided to put them into nonperforming.

[Bryce Rowe:]

Okay. And is there a specific reserve against those two credits at this point?

[John Connerton:]

No, as I commented, we have good loan to values on those, and they're recently appraised, so they're current, what I would say currently in the current market appraised. So those – even at that level, which is certainly different than, let's say 12 months ago. We still have good value in that collateral, and we don't have any specific reserves.

[David Nasca:]

And I would suggest one of those loans has agency guarantees on it as well, which supports the credit. And they're significant agency guarantees. So…

[Bryce Rowe:]

Okay. Okay. Thank you. Thank you all for the comments and questions. And I will step back out.

[David Nasca:]

Nice to talk to you Bryce. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd now like to turn the call back over to President and CEO, David Nasca, for closing remarks.

[David Nasca:]

All right, thanks, Omar. Thank you all for participating in our teleconference today. We're certainly appreciative of your continued interest and support. Please feel free to reach out to us at any time, and we look forward to talking with all of you again when we report our first quarter 2021 results. We hope you have a great day and thanks again.

[Operator:]

Thank you. This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.