Evans Bancorp, Inc.
Q2 2019 Earnings Call Transcript

Published: 28 Jul 2019

[Operator:]

Greetings and welcome to Evans Bancorp Second Quarter 2019 Financial Results. [Operator Instructions] Please note this conference is being recorded. It is now my pleasure to turn the conference over to your host, Deborah Pawlowski. Please go ahead.

[Deborah Pawlowski:]

Thank you, Stacy and good afternoon everyone. We certainly appreciate you taking the time today to join us and thank you for your interest in Evans Bancorp. On the call today with me are David Nasca, our President and Chief Executive Officer and John Connerton, our Chief Financial Officer. David and John will review our results for the second quarter and then we will open it up for questions. You should have a copy of the financial results that were released today after the market close. 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 materially 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. You can find those documents on our website or at sec.gov.So with that, let me turn it over to David to begin. David?

[David Nasca:]

Thanks, Debbie and good afternoon everyone. As reported today, our second quarter 2019 results show net income of $4.4 million, up 16% compared to the last year’s second quarter. The positive results compared to the same period a year ago were driven by higher net interest and fee income. The company’s continuing strong growth through the first half of 2019 has led to our noteworthy performance. We are adding and diversifying relationships across the franchise and footprint, which is delivering growth in loans, deposits and insurance fee income. Our associates’ efforts in the market have increased our brand presence as a competitive financial services alternative delivering in a community-focused framework.John will run through all the numbers in a second, but I thought I would highlight a few brief items here. Our primary emphasis on growing commercially was evident as we delivered an annualized 10% growth rate in commercial loans during the second quarter on top of a 14% compounded annual rate over the last 5 years. We continue to aggressively recruit new individual representatives to the team to execute on our strategic commercial focus. One of the specific areas in which this investment is evident is our talent build related to the business banking initiative housed in our retail distribution channel and interfacing with our commercial relationship management personnel. These business development officers are key to bridging opportunities with current and new clients in the bank’s individual markets and deepening the relationship with other products and services the company provides.While we are having success in our commercial initiatives, we are also investing in other areas of our business particularly in customer-facing innovation to keep evolving and improving customer experience and further expand the reach of our product and service offerings to meet customers’ desires for more streamlined and efficient interactions and experiences. We have new checking products and apps coming online along with new mobile capabilities. Performance in our fee businesses was driven by last year’s acquisition of the Richardson & Stout Insurance Agency. This quarter marks the first full year’s results with Richardson & Stout which has performed as expected providing enhanced earnings and strengthened leadership for current and future management of the insurance groups. The strong loan growth of which we spoke earlier was somewhat dampened by the successful resolution and payoff of the largest non-performing loan in our portfolio at $8.5 million, which occurred during the quarter with no related charge-off. This loan represented approximately 40% of non-performing loan balances as of the end of the last quarter. Credit quality remained strong with net charge-offs of 2 basis points. We remain committed to disciplined underwriting and maintaining a moderate risk profile. We think that the economy is still doing relatively well locally and consumer demand, customer demand continues to be robust.As we look at the current environment and the remainder of the year, there is obviously some uncertainty and challenge in the economy and the outlook for rates. We will however continue to focus on what is within our control, which includes executing on our strategic initiatives, including business banking expansion, digital transformation, fee income enhancement and operational effectiveness and efficiency.Overall, we are very pleased with the quarter, and I want to thank all our associates for their diligent efforts to both drive our business and help our communities thrive. As a result of our associates’ efforts and the company’s success, we are excited to announce the pending purchase of a new administrative headquarters building in the third largest business community in New York State which is Amherst, New York. The new building will allow us to consolidate three separate, currently occupied office buildings into one modern and expanded facility and allow for continued future growth. The consolidation of these locations will enable our associates to move together and work more efficiently, collaboratively and innovatively to provide clients the seamless services they expect.And with that, I will turn it over to John for a closer look at our second quarter results, and then we will take your questions. John?

[John Connerton:]

Thank you, David and good afternoon everyone. As David stated, net income was $4.4 million or $0.88 per diluted share in the second quarter of 2019 compared with $3.8 million or $0.77 per diluted share in last year’s second quarter. Net income was $3.7 million or $0.75 per diluted share in the trailing first quarter of 2019. The increase from last year’s second quarter in the trailing first quarter of 2019 reflects higher net interest income due to loan growth, higher insurance service and fee revenue primarily resulting from the acquisition of R&S and lower provision for loan losses partially offset by an increase in non-interest expense.Turning to the balance sheet, loans grew $27 million in the second quarter, which equates to an annualized rate of 9%. Loan growth from the end of last year’s second quarter was $87 million or an 8% increase. Loan growth in the second quarter was predominantly in the commercial loan portfolio, including $26 million in C&I loans significantly eclipsing our traditionally robust CRE production and reflective of our efforts to diversify loan classes. As David noted, we expect the strong growth trends to continue into 2019 given the strength of the commercial loan pipeline at the end of the first quarter. A better measure of our efforts on the deposit side is comparing average balances for the quarter. Total average interest-bearing deposits of $1 billion were up $16 million or 1.6% higher than the balance at the end of this year’s first quarter. The increase over the linked quarter mostly reflects growth of $11 million in NOW deposits, $14 million in savings deposits, offset by a decrease in average time deposit balances of $9 million. The total NOW and saving deposits increases during the quarter is primarily due to higher municipal and business customer balances and is reflective of our efforts to win new core government banking and C&I relationships. The decrease in time deposit is a result of the bank’s focus on building those core transactional deposits and limiting higher cost CD promotions as part of an effort to manage our cost of funds.The company’s strong balance sheet growth drove an increase in net interest income of $0.9 million or 8% from the prior year second quarter and $0.6 million or 5% from the trailing first quarter. Net interest margin was 3.87% for the second quarter of 2019, up from 3.79% in the linked first quarter, but down from 3.89% in the second quarter of 2018. The improvement in asset yields is due to several items, including the reduction of our non-performing loans, a more typical prepayment fee level and the reduction of the municipal security portfolio. This was partially offset by an increase in funding costs reflecting a rise in both core deposit and wholesale borrowing rates.The company’s deposit betas were stable during the second quarter. Our cumulative beta, which is the beta on our total interest-bearing deposits since December 2015 was 28%, while it was 26% prior to March 2019 compared to our long-term expectation of 46%. We are seeing slight moderation from competition on deposit pricing in our market this quarter. However, we are still concentrating our deposit pricing on acquiring and defending core deposit relationships, and we’ll be accommodative when targeting and retaining these core relationships. The interest rate environment, including the flat yield curve, will continue to present challenges to our margin. We are focused on being disciplined in our loan pricing while maintaining strong levels of growth. While the margin did expand in the second quarter, we expect our margin to experience a moderate level of compression of between 3 and 5 basis points for the remainder of the year.Turning to asset quality, we recorded a $90,000 provision for loan loss for the second quarter of 2019. This is a decrease from the $659,000 provision recorded in last year’s second quarter. As David indicated, the lower provision during the second quarter of 2019 was a result of a decrease in nonperforming loans, primarily due to the pay-down of a single commercial construction loan of $8.5 million. We continue to have confidence in our portfolio’s overall credit quality as quarterly charge-offs remain low at 2 basis points, our allowance to loan ratio decreased from 1.28% in the first quarter of 2019 to 1.26% in the second quarter, and our nonperforming loan to total loans ratio decreased from 1.69% in the linked quarter to 0.91%.Non-interest income of $4.7 million was up over $1.1 million from last year’s second quarter and over $500,000 from the linked quarter. The increase in insurance revenue over the first quarter of 2019 reflects new commercial and personal lines business and seasonally higher policy renewals, while the year-over-year increase also reflects the impact of the R&S acquisition. Insurance revenue of $2.9 million was up from $2 million in last year’s second quarter and $2.4 million in the first quarter of 2018. The growth in insurance revenue was mostly result of the acquisition of R&S in 2018. As is consistent with our historical insurance business, R&S will have some seasonality each quarter in the amount of revenue recorded.Non-interest expenses of $12.1 million increased from the trailing quarter by 8% or about $1 million and increased 19% or $1.9 million from last year’s second quarter. The increase from last year’s second quarter includes an increase of $1 million or 14% in salaries and benefits cost and $0.3 million or 48% in professional services. Higher salary expense is reflecting the R&S acquisition as well as an increase in benefit costs, while the higher professional services fees were largely result of onetime legal and accounting expenses. Income tax expense for the quarter was $1.2 million, representing effective tax rate of 22.1% compared with an effective tax rate of 24.7% in the previous quarter and 23.3% in last year’s second quarter.That concludes my comments. And I would like to open up the line up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Joe Fenech with Hovde Group. Please go ahead.

[Joe Fenech:]

Good afternoon guys.

[David Nasca:]

Hi, Joe.

[John Connerton:]

Hi, Joe.

[Joe Fenech:]

Just a question on share repurchase and capital, I mean the stock’s kind of been stuck in a range here for quite a bit not unlike the sector I guess as a whole, but valuation on book seems pretty reasonable. I mean, what’s sort of your thoughts on share repurchase kind of the longer would kind of stay in this range as a use of potential deployment of excess capital?

[John Connerton:]

So John, I think with our growth, it does limit our ability a little bit. We would prefer to use our capital on the growth side of things. Our CRE percentage does limit some of the possibility of us buying some of those back. I mean when we do have opportunities in the market if we think we have some excess capital we would take those opportunities, but certainly, I think utilizing it for the growth on a loan portfolio is our priority.

[Joe Fenech:]

Yes. No, fair enough. And I am sorry if I missed this, yes, go ahead, Dave.

[David Nasca:]

This is Dave. I think the other issue is obviously a float issue. We can’t be the first or the last in the market, there is some challenges given the size of our outstandings from that, but if we get a shot at a block, we could do that.

[Joe Fenech:]

Okay. Makes sense. So we are going to be opportunistic, but it doesn’t sound like it’s something you are searching or itching to do.

[David Nasca:]

Okay.

[Joe Fenech:]

Did the payoff – I am sorry if I missed this from earlier just from prepared remarks, but did the payoff of the non-performing loan impact the margin and if so, by how much? And then how should we be thinking about the starting point of the margin heading into the third quarter?

[John Connerton:]

So I think it did impact the margin slightly a couple of basis points, because we are able to get rid of a non-performing asset that was earning nothing obviously. And so I would think going forward, the pieces that I would kind of went through that are impacting the margin are going to roll forward with us. So as I suggested in the comments I expect that through now and the end of the year this is a good start point but we will probably reduce between 3 and 5 basis points.

[Joe Fenech:]

Got it. Okay, thank you guys.

[John Connerton:]

You are welcome.

[Operator:]

[Operator Instructions] Our next question comes from Alex Twerdahl with Sandler O’Neill. Please go ahead.

[Alex Twerdahl:]

Hi, good afternoon.

[David Nasca:]

Good afternoon, Alex.

[Alex Twerdahl:]

Just a couple of modeling questions here. First off, it sounds like about $300,000 out of professional service fees, that’s just very specific to the second quarter and we should be heading back down to sort of $6,500ish for the third quarter?

[John Connerton:]

That’s correct, Alex. I would say between our shelf registration and our LTIP S-8 registration, those impacted the quarter uniquely to this quarter, so it should – unless something else comes up which we don’t foresee anything at this point, it should come back down.

[Alex Twerdahl:]

Okay. And then what about benefits, is that something related to self-insuring or something along those lines or is 7.5% kind of the right number to use to start for salaries and benefits going forward?

[John Connerton:]

We are small enough where 1 day, 2 day in a quarter does make a difference. So a portion of that is the days in the quarter. Next quarter does have as many days as this quarter, so 7.5% would be a good start point going forward.

[David Nasca:]

Yes.

[Alex Twerdahl:]

Okay. And then when you think about the insurance line, which is obviously has a bunch of seasonality as well as the acquisition you guys did a year ago. Should the third quarter be pretty similar to the third quarter of last year in terms of kind of the – sort of the jump up in the fees associated with that business and the seasonality?

[John Connerton:]

Yes. I think that will be our first comparable quarter with R&S onboard next – in third quarter. And it should be comparable.

[Alex Twerdahl:]

Okay, great. And then can you just remind me obviously a big resolution out of non-performers this quarter, which is awesome to see. In terms of the remaining non-performers that you have, is there – are they pretty chunky the way this one was or we could see another big resolution at some point in the near future? And if so, is there a pipeline towards something like that happening?

[John Connerton:]

We have two larger commercial real estates obviously not as big as the $8 million, but one about $3 million and another about $2 million. So that represents about 45% of what’s left in there that are on the path just for similar resolutions as this previous one we had in second quarter. And I would say probably within before the end of the year or maybe first quarter of 2020.

[Alex Twerdahl:]

Great. Thanks for taking my questions.

[David Nasca:]

Alright. Thanks, Alex.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the floor over to David for closing comments.

[David Nasca:]

Okay. I would like to thank everyone for joining us today late in July in the middle of earnings season here. I hope you can join us in October when we report our third quarter 2019 results and I hope you all have a great rest of the summer here. So thank you.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.