Evans Bancorp, Inc.
Q4 2019 Earnings Call Transcript

Published: 31 Jan 2020

[Operator:]

Greetings. Welcome to the Evans Bancorp Fourth Quarter Fiscal Year 2019 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. [Operator Instructions]. Please note, this conference is being recorded.I will now turn the conference over to your host, Craig Mychajluk, Investor Relations. Mr. Mychajluk, you may begin.

[Craig Mychajluk:]

Yes. Thank you, and good afternoon, everyone. We certainly appreciate your time today and your interest in Evans Bancorp. Joining me on the call are David Nasca, President and Chief Executive Officer; and John Connerton, Chief Financial Officer. David and John will review our results for the fourth quarter and full year, and then we'll 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 it 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 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 Nasca:]

Thank you, Craig. Good afternoon, everyone. We appreciate you joining us for the call today. We're encouraged with the results this quarter and for the year and the progress we're making in expanding our business and growing earnings in a very competitive banking market and a challenging interest rate environment. 2019 was an outstanding year for the organization with record net income of $17.9 million, which is up 9% over 2018. Our strong performance was led by an expanded commercial loan portfolio, combined with increased fee-based income. The growth of the portfolio is a result of continued strong loan origination, slightly muted with lower advance percentages which should positively impact the future. This level of performance has allowed us to more than offset our continued investments in talent, digital capabilities and new business opportunities.Several key results were delivered during the past year. Total assets grew to $1.5 billion, an increase of 5% over the prior year. Loan growth was a healthy $71 million or 6% as we successfully leveraged our capital into asset growth. Asset quality performance metrics improved with the successful resolution of two larger commercial loans and the collection on a previously charged-off industrial loan, reflecting our disciplined risk management approach. The bank experienced solid deposit growth with an adjusted deposit mix, resulting in the expansion of low cost core deposits. Our dividend rose 13% affirming our commitment to return earnings to shareholders.Also during the year, we identified, purchased and began the process of renovating and preparing to move to a new corporate administrative office. This facility will allow us to consolidate all non-branch associates from three existing facilities under one roof. It is our belief that this will better position our organization to operate more efficiently and effectively, while assisting in growth and the attraction and retention of talent.While we have continued success in profitably growing in our core Western Europe market, we prioritized as part of our strategic plan the evaluation of geographic diversity and expansion to continuous markets.On December 19, 2019, we announced the acquisition of FSB Bancorp and its subsidiary Fairport Savings Bank, a $328 million asset thrift in the nearby Rochester market. FSB has a long community bank legacy in the Rochester market, dating back to 1888. We're extremely excited about this acquisition for several reasons. First, while we have been organically building business in this market for several years, it allows us to expand into another good sized MSA with a lower cost and with concentrated resources. The combined company creates a stronger organization with greater scale as we will leverage the strength of the Evans commercial business model and combine that with FSB’s solid consumer presence to accelerate our entry into the market.The acquisition of clients and deposit funding equates to about two plus years of growth, and there are significant expansion opportunities within our competitive fee-based businesses such as insurance, cash management, municipal deposits and employee benefits. The transaction is on track and we expect to close in the second quarter of 2020, subject to the satisfaction of customary closing conditions, including regulatory approval and FSB shareholder approval.As we look forward, there continue to be headwinds in the financial services industry. The combination of vigorous competition and a difficult interest rate environment has materially impacted margins across the industry. So, while we have expanded assets, that growth in earnings is less than it has been in the past. The three Fed rate reductions late last year impacted our net interest income and when annualized, portend an approximate $2.6 million run rate impact. To help combat the sensitivity to rate changes, we've put considerable time and resources into diversifying our revenue streams, including a formidable insurance business and growing employee benefits administration platform. We further scaled that business at the beginning of 2020 with the acquisition of Benefit Brokers of Western New York.Finally, 2020 is an important milestone in Evans’ history as this year marks a 100 years of serving Western New York. Stable, prudent and strategic management has enabled us to effectively serve and provide returns to all stakeholders, our associates, clients, shareholders and the community over this long history. We believe the relationship focus and strong cultural foundation provides sustainability and excellent prospects for the continued growth and success of our community-based financial organization.I wish to thank all past and present associates, management and Board members for all of their hard work as well as our clients for their ongoing trust and confidence, which has allowed us to prosper over this century.With that, I'll hand it over to John to run through results in more detail, and then we will be happy to take questions. John?

[John Connerton:]

Thank you, David, and good afternoon, everyone. Net income was $4.6 million or $0.93 per diluted share in the fourth quarter, compared with $4.5 million or $0.90 per diluted share in last year’s period. The increase reflected higher net interest income, largely due to an expanded commercial loan portfolio and higher fee-based business income. In the trailing third quarter, net income was $5.2 million or $1.04 per diluted share. The decrease from the linked-quarter was the result of lower net interest income, reflecting lower interest rates and seasonally lower insurance fee revenue. These decreases were partially offset by a loss on a historic rehabilitation tax credit and the corresponding income tax reduction, resulting in a net benefit of $0.7 million in the fourth quarter of 2019.Turning to the balance sheet, as David mentioned, the loan portfolio increased $71 million or 6% to $1.2 billion during the year. In the quarter, loans were up approximately $7 million, which equates to an annualized growth rate of 2%. Our strong originations continued but were muted by some large payoffs. These payoffs were mostly construction loans that were originated with the expectation to go to conduit permanent financing, which currently has longer maturity term structures than the bank's underwriting policy allows. As a result of these types of -- the type of these payoffs, no prepayment penalties were anticipated.Overall the economic environment appears to be on solid footing and in the quarter, we were seeing more C&I activity than commercial real estate transactions. We expect positive new business going into 2020, given the current size of the commercial loan pipeline.Turning to asset quality. The $0.1 million release of allowance for loan losses reflects improved asset quality of impaired loans and marginal loan growth in the quarter. We continue to have confidence in the overall credit quality of our portfolio as quarterly charge-offs and our allowance to loan ratio were 0.3% and 1.24% respectively.Total deposits of $1.3 billion grew $52 million or 4% since the end of last year. The increase was driven by demand deposit growth of 14%, NOW growth of 27% and savings growth of 3%. The $25 million or 8% decrease in time deposits during 2019 included $14 million of broker deposits. Total average demand deposits were $273 million for the 2019 fourth quarter, an increase of $25 million, which was attributable to growth in commercial demand deposits. Given the challenges from the yield curve, we are carefully managing our balance sheet and continually looking to improve our asset mix to be in a position to drive expansion of our net interest margin. Although we have seen some softening of competition for funding, we continue to focus our pricing discipline on areas where we have the ability to reprice which should benefit our cost of funds and limit any loss to core relationships.Net interest margin was 3.67% for the fourth quarter, down from 3.94% and 3.7% in the linked third quarter and 2018 fourth quarter, respectively. When excluding $0.2 million of interest related to the recovery of a single commercial loan that was previously written-off from the trailing third quarter, net interest margin decreased 22 basis points, again, reflecting the decrease in the prime rate. The company's cost of funds were stable during the fourth quarter. As David mentioned, the Fed rate decreases are fully effective at this point. However, we expect to regain some pricing power with repricing over the coming quarters as our CD portfolio has a duration of under one year. Therefore, we expect the margin will moderate close to fourth quarter levels within a few basis points.Net interest income did increase $0.4 million or 3% from the prior year fourth quarter, reflecting growth in our commercial loan portfolio. However, the declining loan yields as a result of the repricing of variable rate loans tied to our prime rate led to the decline in net interest income from the linked third quarter. Non-interest income for the quarter of $3.3 million increased $0.2 million from last year's fourth quarter but was down $1.9 million from the linked quarter. The decrease was a result of insurance revenue being down from the linked quarter, which is reflective of the seasonal decrease in commercial lines, insurance commissions and a decrease in profit sharing revenue. Additionally, the net loss related to the historic tax credit impacted non-interest income during the quarter. Fourth quarter non-interest expenses increased 6% from the prior period, but were down marginally from the third quarter of 2019. The change from last year's fourth quarter includes an increase of $0.5 million of professional services, about half of which were merger-related costs.We recognized income tax benefits in the fourth quarter of 2019 and 2018 due to historic tax credit transaction. Excluding the impact, the fourth quarter effective tax rate was 18.9%, compared with 23.1% in last year’s period.That concludes my comments. So, I now will like to open the lines for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Alex Twerdahl from Piper Sandler. Alex Twerdahl, you are now live.

[Alex Twerdahl:]

First of all, I wanted to start on talking a little bit more about the loan dynamics that we saw during the quarter. The growth I'd say wasn't exactly reflective of the commentary that you guys suggested on the call last quarter. So -- and I know that you mentioned that perhaps growth was muted by some large paydowns. So, maybe just talk a little bit more about the dynamics and the amount of originations et cetera in the fourth quarter. And then where the pipeline stands as we head into 2020?

[John Connerton:]

Yes. The originations -- this is John -- for the fourth quarter was the second -- probably right around what the average was for the year, in the middle of where it was all of last year for all fourth quarters. So, it was a decent origination quarter, and as I suggested driven by C&I activity. But we did have some large payoffs that were expected eventually, but these projects -- these construction projects actually stabilized much quicker than expected. So, those payoffs came. However, there were construction loans that were originally -- originated that were expected to go out to other financing conduits because of just the structure that they expected at the time of the construction being completed and the stabilization.So, if those were more -- they kind of clustered in the fourth quarter, if they were spread out more as what we would have expected from the stabilization period, we think those numbers would have been reflective of good originations in the quarter, as we expressed in our last conference call.

[Alex Twerdahl:]

Understood. And then as we head into 2020, maybe where the pipeline stands and whether or not there’s any other similar type of projects that potentially could be muting growth potential for the first quarter?

[John Connerton:]

We're not aware of any that are -- that we know are going to at this point be similar types of projects. We get -- sometimes these things come up, but we don't know of any in the pipeline at all that should payoff. But the originations that we have in the pipeline are robust and similar to the past quarters in 2019. So, we're comfortable that it should drive the bottom growth line on those assets.

[David Nasca:]

I think there is one other point too. Some of these construction loans that we have originated also had lower draw percentages, and those lower draw percentages also muted the loan growth, but they should be advantageous to us over the longer term as they start to draw down.

[Alex Twerdahl:]

Okay. Understood. And then I just got a bigger picture on loan growth. The last couple years, you have been kind of growing sort of low teens. This year, it was about half of that just for the overall year, as you obviously have a bigger balance sheet. But as you kind of look forward in 2020, 2021, in terms of the opportunities that are out there, may be a lot of the merger-related activity in the market is gone but you're getting some more opportunities from just being a bigger institution. How should we be thinking about just kind of overall loan growth for the full year 2020 and ‘21 kind of based on where you guys stand today?

[David Nasca:]

I will let John answer in some detail, but let me start with that, Alex. I think what we have said -- what we were saying even last year was we thought we were going to moderate a little bit on the growth from the low double-digits to the high single-digits. Now this was a fraction lower than that for the reasons mentioned previously. But we expect that to continue to be where we are going in terms of growth in the high singles -- the high single percentages. Your other question was in terms of the banks and the merger and acquisition consolidation being biased, we had effectively in a market that goes from Syracuse back to here, you had four banks announced at the end of the year. So, we think there is still opportunities where some deals have gotten done where it’s going to provide opportunity to compete through some clients there as well.

[Alex Twerdahl:]

Understood. And then just kind of drilling into the market a little bit more. In terms of loan repricing from the cuts in September and October, has that fully impacted you think on the loan yield at this point?

[John Connerton:]

Yes. So, last quarter I said somewhere between 11 and 13 and then the impact of the 25 that we didn't talk about is another 5 to 8. So, we're on the high end of that. But we think those are all fully baked at this point, and we might modulate based on some of the pricing that we have on the cost of funds side, but it should move within that 3 basis points as I suggested earlier.

[Alex Twerdahl:]

Okay. And then just as we kind of look to your loan pipeline today, and the weighted-average yield on that pipeline relative to the book yield on the loan portfolio, is there -- what kind of discrepancy is there?

[John Connerton:]

So, that has been an impact through last year and in the quarter. But I'd say the yield on those loans that we are putting on the books are probably at or slightly below what our current yields are.

[Alex Twerdahl:]

Okay. And then just switching over to the cost of funds, I know cost of funds are flat. I know you guys mentioned some CD promotions et cetera that might reprice later in the year. But then looking at things like NOW and savings, it looked like those actually increased in the fourth quarter. Maybe you can just talk about your expectations whether or not you think we are going to see an inflection point for the cost of some of those deposits categories early in 2020?

[John Connerton:]

I think there are opportunities there also for some pricing to be able to look at those portfolios and bring them down. Some of the increases were due to attracting core customers, but we did have some -- with their full relationship in giving kind of special rate increases, but we are looking at those portfolios, and we think those have top ended and the opportunity is especially from -- as the market has moved down. And the competitive environment is such that it will give us an ability to reprice some of those current portfolio customers.

[David Nasca:]

Alex, one other thing I'd say about that too is that growth in the quarter was reflective of two pretty good trends. One was commercial checking and other checking, and municipal deposit gathering. We expanded our growth in those businesses a little bit as a function of some of our business loans and as a function of some of our acquisitions of clients in the business segment. So, we feel good about the deposits we are gathering.

[Operator:]

We have reached the end of the question-and-answer session. I will now turn the call back over to management for closing remarks.

[David Nasca:]

Okay. I'd like to thank everybody for joining us today, participating in the teleconference. We appreciate your continued interest and support. Please feel free to reach out to us anytime. We look forward to talking to all of you again in April when we report the first quarter 2020 results. Have a great day.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.