Evans Bancorp, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Greetings, and welcome to the Evans Bancorp First Quarter 2018 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Craig Mychajluk with Investor Relations. Please go ahead.

[Craig Mychajluk:]

Yes, thank you, Hector. And good afternoon, everyone. Certainly appreciate you taking the time to join us and your interest in Evans Bancorp. On the call today, we have David Nasca, President and Chief Executive Officer; and John Connerton, Chief Financial Officer. David and John will review our results for the first quarter, 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 closed. 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 the securities and exchange commission, you can find those documents on our website or on sec.gov. So with that, let me turn it over to David to begin.

[David Nasca:]

Thanks, Craig. Good afternoon, everyone. As you've seen today, we reported first quarter 2018 results with net income of $3.3 million or up 5% at $0.68 per diluted common share compared to $0.66 for last year's first quarter. Compared to the same period a year ago, we delivered higher net interest income and fee income. These were offset by higher provision for loan losses, which was largely driven by providing for the strong loan growth during the quarter. On the whole, 2018 is off to a strong start. This has been the result of efforts from our associates executing on our strategic plan and taking additional market share. Due to certain accounting treatments in singular comparative events, the results require some additional commentary and discussion around timing and John will walk you through the various components. However, the core operating results were strong, mostly as a result of the investments made in key business lines, 3 of which are worth mentioning

[John Connerton:]

Thank you, David, and good afternoon, everyone. As David stated, net income was $3.3 million or $0.68 per diluted share in the first quarter of 2018 compared with $3.1 million or $0.66 per diluted share in last year's first quarter. Net income was $1 million or $0.20 per diluted share in the trailing fourth quarter of 2017. The increase over both comparative periods, primarily reflects higher net interest income due to loan growth and lower income tax expense related to federal income tax reform. The fourth quarter of 2017 included a onetime $2.1 million deferred income tax expense related to the signing of the Tax Cuts and Jobs Act. Turning to the balance sheet. Loans grew $45 million, which equates to an annualized rate of 17% in the first quarter. Loan growth from the end of last year's first quarter was $164 million, also a 17% increase. Loan growth in the first quarter was predominantly in commercial loan portfolio, including $24 million in commercial real estate and $13 million in C&I loans. As David noted, we expect the strong growth trends to continue into 2018 given the strength of the commercial loan pipeline at the end of the first quarter. Total deposits of $1.1 billion grew $83 million in the quarter or 8%, and we are $156 million or 16% higher than the balance at the end of last year's first quarter. Municipal deposit growth of $62 million drove the total deposit growth in the first three months of 2018, due to seasonal inflows from tax receipts as well as the continued acquisition of new customers. The company also experienced solid growth in its commercial deposit portfolio, including $8 million in demand deposits and $12 million in saving deposits. Consumer savings deposit growth has been challenging as preferences move towards termed products with higher rates and local market competition has stiffened. Consumer savings deposit decline $20 million during the quarter, while consumer time deposits grew $18 million during the first quarter. The company's strong balance sheet growth drove an increase in net interest income of $1.8 million or 19% from the first year -- from prior year first quarter, and $0.3 million or 3% from the trailing fourth quarter. Net interest margin was 3.77% for the first quarter of 2018, down slightly from 3.79% in the linked fourth quarter and unchanged from the 2017 first quarter. The improvement in loan yields, which have continue to benefit from the repricing of variable-rate loans tied to the company's prime rate, was offset by an increase in funding costs, reflecting a rise in both core deposit and household borrowing rates due to the increase in short-term interest rates. The company's deposit beta has moved higher during the first quarter. Our cumulative beta, which is the beta on our total interest-bearing deposits since December 2015 was 16%, while it was 6% before this December 2017, compared to our long-term expectation of 46%. Turning to asset quality. The $767,000 provision for loan loss for the first quarter of 2018 reflected provision needed to account for the quarter's strong loan growth and 1 large downgrade in the commercial loan portfolio. We released $435,000 in reserves in last year's first quarter, when loan growth was more muted and criticized loans had declined. Criticized loan trend can be choppy due to upgrades or downgrades, and a small number of large commercial relationships. We continue to have confidence in our portfolios overall credit quality, as quarterly charge-offs remain low at 0.3%. Our allowance to loan ratio was unchanged quarter-over-quarter at 1.32% and our nonperforming loan to total loans ratio increased from year-end by only 4 basis points to 1.33%. Noninterest income for the quarter of $3.8 million it was up almost $300,000 from last year's first quarter and approximately $800,000 from the linked quarter. The fourth quarter of 2017 included the impact of a net reduction of noninterest income of approximately $500,000 related to investments in historic rehabilitation tax credits. There were no historic tax paid investments in each of the first quarters of 2018 and 2017. Insurance revenue of $2 million was down from $2.2 million in last year's first quarter, but up from $1.6 million in the fourth quarter of 2017. The decrease from last year's first quarter is related to a change in our revenue recognition policy for profit-sharing income. This revenue source was mostly recognized in the first quarter of previous years, when profit sharing payments were made by insurance carriers. Beginning with 2018, the company will be accruing this revenue over the course of the year, which has the effect of reducing the seasonal revenue in the first quarter and increasing profit-sharing revenue recognized in the second and third quarter. Fourth quarter revenue will vary as management adjust accruals to expected profit-sharing payments in the first quarter of the following year. The accounting change has no impact on the full year profit-sharing revenue recognized. Profit sharing revenue of $0.2 million in the first quarter of 2018 compares with $0.6 million in last year's first quarter. Excluding profit sharing revenue, insurance revenue increase $0.2 million from the prior year as employee benefits sales in commercial life insurance continue to achieve good results. Noninterest expenses of $10.2 million decrease from the trailing quarter by 2% or about $0.2 million, and increased 12% or $1.1 million from last year's first quarter. Other expenses in the fourth quarter of 2017 included the impact of a $300,000 contribution to Evans Bank Foundation Fund. The first quarter of 2018 also includes approximately $250,000 in total cost related to the previously announced onetime $1,000 bonus paid to the nonsenior associates. The increase from last year's first quarter includes an increase of $1 million, or 17%, in salaries and benefits costs and a $0.2 million, or 26% in technology expenses. Higher salary expenses reflect the strategic personal hires made in 2017 to support our growth strategy as well as an increase in incentive compensation and benefits costs. While the higher technology expenses reflect of the implementation of our new online banking platform in the second quarter of 2017. Income tax expense for the quarter was $1 million, representing effective tax rate of 22.8% compared with an effective tax rate of 69% in the previous quarter and 30.7% in last year's first quarter. The difference was driven by the $2.1 million charge to the company's deferred tax asset, due to the new tax law signed in December 2017 and by the impact of historic tax credit investment transactions in 2017. Excluding the impact of the historic tax credit transactions and the write-down of the deferred tax asset, the effective tax rate for the fourth quarter of 2017 was 29.8%. The decrease in the effective rate in the first quarter of 2018 reflects the benefit of federal tax reform, which decreased the company's marginal federal income tax rate from 35% to 21%. That concludes my comments. So now I would like to open up the line up for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Alex Twerdahl with Sandler O'Neill.

[Alexander Twerdahl:]

First off, I just wanted to ask John for a little bit more clarity on what's going on with the deposit cost this quarter. I know in year's past, you guys have run some promotions in the earlier part of the year that have brought in big balances of deposits. Is that what's going on here? And maybe some promotional rates that drove cost higher at the beginning of the year, that potentially could moderate a little bit? Or really what drove the cost of deposits higher sequentially?

[John Connerton:]

I think the biggest impact on those -- the cost of funds was on our municipal side. We do aggregating those dollars, a lot of those dollars weren't just seasonal but new relationships in. And with the increase in short-term rate, those are a little bit more sensitive in our typical portfolio -- our consumer portfolio. So that had the biggest input -- impact, Alex, on our cost of funds during the first quarter of this year.

[Alexander Twerdahl:]

Okay. What would be the incremental cost for those sets of deposit?

[John Connerton:]

So as of right now, our promo rate on that is about 60 basis points.

[Alexander Twerdahl:]

60 basis points, okay.

[John Connerton:]

That's written, since the average that we would have in fourth quarter. So what do you see in the first quarter is more emblematic of what the true run rate on those deposits are at this point.

[Alexander Twerdahl:]

Is there still an emphasis to bring those into the second quarter? Or is there less of an emphasis?

[John Connerton:]

The seasonality will bring it down. We are still emphasizing those deposits, but we are -- instead of in the first quarter, we are going to have a promotion in the second quarter in our consumer side. So that should -- that will probably supplement whatever we garnered in the first quarter on municipals, it will be more consumer based in the second quarter.

[Alexander Twerdahl:]

Okay. So we should expect in the second quarter another good quarter for deposit inflows, but potentially due to those promotions the could be a little bit higher than where they are today?

[John Connerton:]

Yes, exactly.

[David Nasca:]

Okay. Alex, I would say our goal is for deposit inflows, we've seen some of that, as we always do in the quarter. The challenge though, is also offsetting consumer behavior, where they have moved from maybe savings and some money market accounts to term deposits. So there'll be a little bit of that as well, which impacts the cost.

[Alexander Twerdahl:]

Yes, for sure.

[John Connerton:]

So I think overall, Alex, when you look at the margin, we do have some offsetting benefit, obviously, with the increase in prime from the Feds movement.

[Alexander Twerdahl:]

Great. And could you remind us is about 1/3 of the loan portfolio that reprices [indiscernible] within 90 days?

[John Connerton:]

Yes, that's correct.

[Alexander Twerdahl:]

Okay, great. And then just to make sure I understand the change to the accounting around the insurance line, so the $197 million -- if you had, under the old accounting method that would have been $2.4 million, is that right?

[John Connerton:]

Yes around $400,000 difference, just due to the revenue recognition of that particular line.

[David Nasca:]

It's still going to come in, but you always use to talk to about. Yes, the first quarter is the big quarter because of profit sharing, it's basically going to be spread through the year now.

[Alexander Twerdahl:]

Okay. And so the other is that, that is $400,000 gets divided up between the second and the third quarter?

[John Connerton:]

Exactly.

[Alexander Twerdahl:]

Okay. Right and in the fourth quarter, we still get a little bit of seasonality in that. Can you just run through sort of, what happened in the fourth quarter again for insurance?

[John Connerton:]

Yes, we have a little seasonality that's kind of unknown because that's one we kind of true-up with the insurance companies our performance on our bottom line. So we don't know what that seasonality will be if we perform as we have in the past, there shouldn't be any measurable seasonality. But I guess there is just a heads up that there may be some, but not a material amount for the whole year, taken into -- when you look at the whole year.

[Operator:]

[Operator Instructions]. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remark.

[David Nasca:]

All right. Thank you very much. Thank you all for joining us today for the teleconference. I hope you can all join us in July when we will report our second quarter 2018 results. And I hope you have a great day. Take care.

[Operator:]

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