Evans Bancorp, Inc.
Q2 2018 Earnings Call Transcript

Published: 28 Jul 2018

[Operator:]

Greetings and welcome to the Evans Bancorp Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations. Thank you, sir. You may begin.

[Craig Mychajluk:]

Yes, thank you, and good afternoon, everyone. We 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 CEO; and John Connerton, our CFO. David and John will review our results for the second quarter, and then we'll open it up for questions. You should have a copy of the financial results that we 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 documents filed by the company with the 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, and good afternoon, everyone. As you've seen today, we reported second quarter 2018 results with net income of $3.8 million, a 43% increase; and $0.77 per diluted common share, up from $0.54 in last year's second quarter. These results were driven by higher net interest income, which increased 21% and higher fee income. Overall, we thought it was a good quarter highlighted by continued execution of our strategic priorities by our associates, including business-focused organic market growth, evolving our retail network and increasing fee income. We continue to grow our loan portfolio this quarter. However, our 6% annualized loan growth was muted by larger loan payoffs than are typical in a quarter. The payoffs include two Shared National Credits equal to $12 million, which we elected not to participate in the refinance of. Without the payoffs, our growth would have been in line with our historical double-digit trends. Key to the implementation of our relationship-based strategy is the focus on winning small to midsize business relationships. This includes reformatting our retail distribution model to enable personnel to deliver outbound sales of customized solutions. As I discussed last quarter, we will open our first business and relationship center in downtown Buffalo later in the third quarter of 2018. This location with its new format will be another key building block in the evolution of our delivery strategy. As funding becomes more important, due to the current interest rate environment and our strong asset growth, we believe we are positioning the bank to succeed in attracting commercial deposit clients. Average core demand deposit growth in this quarter is reflective of this focused strategy. We continued to invest in our business during the quarter, including our fee-based business with the acquisition of the Richardson & Stout Insurance Agency. The agency generates $2.5 million in revenues annually, taking our total insurance business revenue to over $10 million per year. The acquisition strengthens our agency market position with expertise in several areas enhancing our institutional insurance portfolio, which will aid the cross-pollination of municipal banking and employee benefits business lines. Looking forward, our commercial loan pipeline continues to be robust and should benefit from higher loan yields as a result of Federal Reserve rate hikes. Additionally, a lower federal tax rate from the recent federal tax reform should enhance returns. Conversely, with rates increasing, we expect funding costs and deposit betas to rise as they have this quarter, due to consumer demand for higher yield and intense competition from other financial institutions. With that, I will hand it over to John Connerton to run through the results in more detail. And then, we'll be happy to take questions. John?

[John Connerton:]

Thank you, David, and good afternoon, everyone. As David stated, net income was $3.8 million or $0.77 per diluted share in the second quarter of 2018, compared with $2.6 million or $0.54 per diluted share in last year's second quarter. Net income was $3.3 million or $0.68 per diluted share in the trailing first quarter of 2018. The increase over both comparative period, primarily reflects higher net interest income, due to loan growth, net interest margin expansion, and a lower income tax expense related to federal income tax reform. Turning to the balance sheet. Loans grew $16 million in the second quarter, which equates to an annualized rate of 6%. Although as previously stated, we experienced larger-than-typical payoffs in the quarter. Excluding those payoffs, our annualized growth rate equaled 10%. Loan growth from the end of last year's second quarter was $179 million, a 15% increase. Loan growth in the second quarter was predominantly in the commercial loan portfolio, including $14 million in commercial construction. As David noted, we expect the strong growth trends to continue in the second half of 2018, given the current strength of the commercial loan pipeline. Total deposits of $1.2 billion grew $48 million in the quarter or 4% and were $163 million or 16% higher than the balance at the end of the last year's second quarter. Commercial savings deposits increased $30 million in the second quarter and were the primary driver of the total growth in deposits combined with $19 million in brokered CDs. Consumer savings deposit has been challenging as preferences moved toward term products with higher rates and local market competition has stiffened. Consumer savings deposits declined $15 million during the quarter, while consumer time deposits grew $19 million. The company's strong balance sheet growth was the catalyst for an increase in net interest income of $2.1 million or 21% from the prior year's second quarter and $700,000 or 6% from the trailing first quarter. Our net interest margin was 3.89% for the second quarter of 2018, up from 3.77% or 3.74% in the linked first quarter and 2017 second quarter, respectively. As a result of increases in short-term interest rates, there continues to be improvement in our loan yields, which have benefited from the repricing of variable rate loans tied to the company's prime rate. These yield increases were offset by a rise in funding costs, reflecting increases in both core deposit and wholesale borrowing rates. As expected, deposit betas continue to increase in the second quarter. Our cumulative beta since December 2015 was 12%, up from 10% last quarter, while our beta since March 2018 was 24%. Our expectation is that betas will continue to increase throughout the remainder of the year, particularly on the consumer side. Turning to asset quality. The $659,000 provision for loan losses for the second quarter of 2018 reflected an increase in nonperforming loans, which led to a 73 basis point increase in the nonperforming loans to total loans ratio to a level of 2.06%. The increase is due to a single commercial construction loan of $9 million that was downgraded to nonaccrual status after it exceeded its original maturity date and the bank did not agree to an extension. After the end of the second quarter, the borrower brought the loan current as part of a negotiated forbearance agreement. At this point, the construction of the property is substantially complete. Based on management's analysis and current collateral valuation, the loan is considered to be adequately reserved. You may be aware of Evans being mentioned amongst several local banks in an indictment of four individuals who have been accused of fraud in the refinancing of mortgages with Fannie Mae and Freddie Mac. We and the other banks provided construction and development loans to these individuals. The Evans loan mentioned in the indictment was a construction loan made back in 2011 that was paid off in 2013. We applied our standard prudent underwriting processes and guidelines when we made the construction loan. We have four outstanding commercial real estate loans currently totaling $6 million to the development company where two of the indicted individuals worked [indiscernible] on these properties, which included not just site inspections, but the validation of leases and verifying cash receipts of rent. These are stable performing properties, and the loans have relatively low loan to value ratios of approximately 38% on average. We continue to have confidence in our portfolio's overall credit quality as quarterly charge-offs remain low at 0.04% and our allowance to loan ratio was up slightly quarter-over-quarter to 1.35%. Noninterest income for the quarter of $3.6 million was up $550,000 from last year's first quarter, but down approximately $150,000 from the linked quarter. The decrease from the second quarter of 2017 included the impact of a net reduction of noninterest income of approximately $300,000 related to investments in historic rehabilitation tax credits. There were no historic tax credit investments in each of the first or second quarters of 2018. The decrease, when compared to the first quarter of 2018, is due to lower fair value adjustments to the company's mortgage service right assets and equity securities. Noninterest expenses of $10.2 million were little change from the trailing quarter but increased 10% or $900,000 from last year's second quarter. The increase from last year's second quarter include an increase of $400,000 or 7% in salaries and benefit cost, $100,000 in FDIC assessment and $100,000 in advertising expenses. Higher salary expenses reflect personnel hires made to support our growth strategy. Advertising expenses increased in the second quarter of 2018, due to promotional campaigns for the company's deposit products. Income tax expense for the quarter was $1.2 million, representing an effective tax rate of 23.3%, compared with an effective tax rate of 22.8% in the previous quarter and 24.8% in last year's first quarter. The effective tax rate for the second quarter of 2017 reflects the benefit of historic tax credit and investment transactions. Excluding the impact of the historic tax credit transactions, the effective tax rate for the second quarter of 2017 was 34.2%. That concludes my comments. So, I now would like to open up the line, up for questions.

[David Nasca:]

Okay. Thank you very much, Jesse. Thank you for participating in our teleconference today. We appreciate you listening in. And I hope you can join us in October, when we report our third quarter 2018 results. Have a wonderful day. Thank you again.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.