Evans Bancorp, Inc.
Q4 2018 Earnings Call Transcript

Published: 1 Feb 2019

[Operator:]

Greetings and welcome to Evans Bancorp Fourth Quarter and Full Year 2018 Financial Results. At this time all participants are in a listen-only mode. Question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Deborah Pawlowski, Investor Relations for Evans Bancorp.

[Deborah Pawlowski:]

Thank you, Diana and good afternoon everyone. We certainly appreciate you taking the time to join us today 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 be reviewing the results of the fourth quarter and the full year 2018. And then we will open it up for questions. I hope you have a copy of the financial results that were released today just after the market closed. If not you can access that on the company's Web Site at www.evansbank.com. As you are aware, we may make some forward-looking statements during the formal discussion as well as during the question-and-answer session. 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 the Securities and Exchange Commission. You can find those documents on our Web Site or at sec.gov. So with that, let me turn it over to David to begin. David?

[David Nasca:]

Thank you, Debbie, and good afternoon everyone from a snowy and cold Buffalo, New York not exactly a Chamber of Commerce day but we're thrilled to be here with you today. As you've seen today, we reported full year 2018 results with net income of $16.4 million or $3.32 per diluted common share; 2018 was a record year for Evans. And I want to thank all of our associates for all their hard work as well as our clients for their ongoing trust and confidence in us. Our performance was driven by continued focus on growth and market share expansion which is reflected in our annual loan growth rate of 8.5% primarily the result of increases in commercial loans. This growth was muted a bit as the company rotated out of a portfolio of lower yielding Shared National Credits acquired to leverage capital raised in 2017 and migrated into core relationship business loans. This strategy and its impact were evident in the level of growth this quarter, notwithstanding the diminishment of the Shared National Credit portfolio, which typically has higher balances, our current loan pipeline remains robust. We are applying the same vigilance and funding costs and margin that we have focused in our loan portfolio yield. As we had anticipated this quarter interest rate betas have slowed from the accelerated pace we experienced in the third quarter. As funding costs became more challenging due to the current interest rate environment, we believe we can stay disciplined in managing deposit costs with our proven abilities to attract new core deposit customers, deepen our relationships with our existing clients and benefit from the competitive structure of our market to help impose rational pricing. Our efforts to diversify revenue sources continued to produce higher non-interest income through 2018. Among other areas our insurance division stood out with its performance in a markedly successful year growing revenue 19% or $1.5 million over 2017 results. This growth was due in large part to the acquisition of the Richardson & Stout Insurance Agency on July 1. It was our 15th in the insurance business. Additionally, organic growth in our commercial insurance and employee benefits businesses which both have been focus areas of investment over the past few years added to these results. I've spoken previously that the Richardson & Stout Insurance Agency acquisition was strategic beyond just adding to financial results. Last year, Bob Miller, former President of the Evans agency and senior leadership team member at the bank announced his retirement effective in March. Former commercial lines insurance leader, Mark St. George was internally promoted to President and as planned, President of the Richardson & Stout Insurance Agency, Aaron Whitehouse and Vice President, Ian Whitehouse will move into the Chief Operating Officer and Vice President of commercial lines leadership positions respectively at the combined company, which is now a $10 million revenue agency. Bob will continue his service in his Corporate Board position after his retirement. We have many opportunities to responsibly grow the company by executing on our strategic priorities in 2019. We will stay focused on targeted investments in talent, markets, operational effectiveness and scalability that help expand our success in attracting new business relationships. We expect these efforts will provide operating leverage and coupled with risk and expense management will enable us to continue creating long-term value for our investors through time. Finally, with respect to financials, all have seen the relative financial market volatility that began late in 2018. While the market has experienced gyrations due to interest rate increases, political decisions like foreign tariffs and government intransigence, we continue to have optimism and see strong macroeconomic performance including employment and local market opportunities and expansion for a true community anchored financial institution. Before I hand things off to John, I want to talk for just a minute about Evans strong commitment to the community as we prepare to mark a century of serving West New York in 2020. Last year as a function of our continued growth and performance, Evans made signature commitments to three community organizations. We invested in two newly formed community charter schools as part of the National Building Excellence Schools program to support enrichment and after school programs. And we funded a new workplace initiative focused on bringing United Way Resources, financial education and small dollar loans and savings into the workplace to assist employees in persisting in their jobs. These investments are not intended as mere goodwill, but to reinforce our role as a true community partner. With that, I'll hand it over to John to run through the results in more detail and then we'll be happy to take any questions. John?

[John Connerton:]

Thank you, David, and good afternoon everyone. As David stated, net income was $4.5 million or $0.90 per diluted share in the fourth quarter of 2018 compared with $1 million or $0.20 per diluted share in last year's fourth quarter. Net income was $4.8 million or $0.97 per diluted share in the third quarter of 2018. The increase from prior year primarily reflects higher interest income from loan growth, higher non-interest income due to increased insurance revenue and a lower income tax provision. The decrease from the linked quarter reflects lower insurance fee revenue due to a higher seasonal commercial lines revenue that is typical of the third quarter. For the full year 2018, net income was $16.4 million up 56% from $10.5 million in 2017. Earnings per diluted share increased 54% or $1.16 to $3.32, excluding the impact of tax reform, net income for the full year of 2018 was up 30% or $0.73 per diluted share. The return on average equity was 13.20% for 2018 compared with 9.11% in 2017. The efficiency ratio for 2018 improved to 66.87% from 68.5% in 2017. Turning to the balance sheet for the year, the loan portfolio increased by $91 million or 9% to $1.2 billion. As David mentioned loan growth in the fourth quarter was muted by the pay outs of larger participated loans, in particular a couple of Shared National Credit. Throughout the year, we have been taking opportunities to rotate out of these credits preferring to replace the balances with higher yielding core customers. During the fourth quarter this amounted to additional pay outs of $23 million. The remaining Shared National Credit portfolio is currently under $10 million. We had strong gross originations during the quarter which offset the large payoff and we expect positive new business going into 2019, given the current size of the commercial loan pipeline. Total deposits of $1.2 million grew $164 million from the previous year or 16%. The year-over-year increase was across all the company's product better category including demand deposit growth of 6%, [indiscernible] growth of 1%, saving deposit growth of 7% and time deposit growth of 62%. Total deposits remained flat during the fourth quarter decreases in demand and savings balances are reflective of seasonal fluctuation in municipal deposits as municipalities typically are utilizing cash reserves in anticipation of first quarter tax budget. The bank continues to respond to customers preferences moving toward term products as time deposits grew $7 million during the quarter. Net interest income increased $0.2 million from the third quarter of 2018 and increased $1.2 million or 11% from prior year fourth quarter. Our net interest margin was 3.7% for the fourth quarter of 2018 down from 3.73% and 3.79% in the linked third quarter and 2017 fourth quarter respectively. A cumulative beta since December 2015 was 24% up slightly from 22% last quarter compared to management's expected full cycle beta up 44%, beta movements are not linear from quarter-to-quarter, it can have variability as we strategically manage the balance sheet. As David discussed, this quarter increases in the cost of funds has moderated in comparison to third quarter's increased level. Our expectation is that our cost of funds will continue to moderate to the long-term cycle expectation. Turning to asset quality, the 276,000 negative provision for loan loss for the fourth quarter of 2018 reflected lower loan growth and a decrease in criticized asset. We continue to have confidence in our portfolio's overall credit quality quarterly charge offs meaning low at 0.05%, non-performing loan ratio decreased from 2% at the end of third quarter with 1.64% at year end. The decrease was mainly as a result of the successful sale of a larger non-performing commercial real estate property by the borrower. Non-interest income for the quarter of $3 million was in line with last year's fourth quarter, but down 1.7 from the linked quarter. During last year's fourth quarter, the company realized $0.3 million gain on bank-owned life insurance plan. The decrease from the linked quarter was largely due to a $1 million decrease in insurance revenue due to the seasonal decrease in commercial lines insurance commissions and profit sharing revenue and a $0.9 million net reduction of non-interest income related to an investment in a historic rehabilitation tax credit. Non-interest expenses of $11.4 million were flat compared to the trailing third quarter stood at $1 million or 10% from last year's fourth quarter. Salary and benefit costs, our largest expense line was the main reason for the increases of 130,000 from the linked quarter and 972,000 from the prior year fourth quarter. The increase from the linked quarter was due to an additional approval of $200,000 for employee incentives based on 2018 performance. About $400,000 of the increase from prior year is due in part to the addition of 15 employees from the R&S Insurance Agency acquisition with the remainder due to investments in new associate supporting our growth. In the fourth quarter, an income tax benefit of $196,000 was recognized compared to $2.2 million in last year's fourth quarter. The effective tax rate for each of the fourth quarter is up 2018 and 2017 reflects the benefit of a start tax credit investment transaction. Last year's fourth quarter also included the write-offs of deferred tax assets related to tax reform. Excluding the impact of the historic tax credit transaction and the write-off of the deferred tax assets, the effective tax rate for the fourth quarter of 2018 and 2017 was $23.1% and 29.8% respectively. That concludes my comments, so I now would like to open up the line for questions.

[Operator:]

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alex Twerdahl from Sandler O'Neill. Please proceed with your question.

[Alex Twerdahl:]

Hey, good morning guys. I mean good afternoon.

[David Nasca:]

Good afternoon.

[Alex Twerdahl:]

First off, John with Richardson & Stout acquisition, can you just kind of give us a little bit more color, guidance on how we should be thinking about that insurance service line revenue going into 2019?

[David Nasca:]

Sure. I think I mentioned this in the past. The total revenue expectation increase is about $2.5 million with the addition of Richard & Stout, in that you could probably evenly spread that throughout the year. They got a bottom-line perspective from an EBITDA perspective of about $900,000 to our bottom-line, again spread throughout the year-over-year. I think obviously we recognized about half of that in '18. So the increase for '19 would be half of that again.

[Alex Twerdahl:]

And then just thinking about the seasonality which I know you guys have done some things to kind of smooth out the lumpiness over the four quarters. However, the fourth quarter was obviously a big pullback from the third quarter. So kind of how do we think about the seasonality over the fourth quarters for all the insurance revenue now going into 2019?

[David Nasca:]

I think the seasonality is going to be similar to 2018 adjusting for Richard & Stout obviously. So what we've done to kind of to smooth out some of that revenue is specifically on the profit sharing and not which is a portion of the total revenue, but obviously a smaller portion of the total revenue in relation to commission. So I would suggest that 2018 is a good model for 2019.

[Alex Twerdahl:]

Okay. And then, the reserve release or the provision credit during the quarter was that purely driven by qualitative or quantitative factors or is there some qualitative factors in there too as the economy still in pretty strong?

[David Nasca:]

Throughout all of '18 we've had some benefit from our qualitative moments as our metrics there are becoming more and more positive. Yes, there is some qualitative in each of our quarters positively moving effecting our provision. But mostly it was due to the reduction of criticized basket. So things coming out of our core non-performing, while coming out of criticize or higher risk rated credit.

[Alex Twerdahl:]

Okay. And then, just talking about deposit generating growth strategies in the New Year, loan to deposit ratio is obviously basically flat considering the lack of loan growth and lack of deposit growth. Did you feel like maybe there wasn't as much pressure in the fourth quarter just kind of knowing that some of those big Shared National Credits would roll-off and give you a little bit more flexibility to fund new loan generation? And maybe that's one of the reasons why deposit costs have slowed or do you think that what kind of maybe and I see a little bit more slowly now and as we head into that '18 into higher deposit costs?

[David Nasca:]

I think there's a couple of questions in there if I could Alex. We think that you have seen the loan to deposit ratio come down because we have done better on the deposit side. Pricing has gotten more rational because the big players have sort of not chased the newer players that were trying to buy some market share and we've been able to continue to generate deposits with our existing clients, well with our existing and targeted clients. The fact that we are commercial oriented has helped us drive deposits in our existing customer base and new customer base in core type of deposits, so you always talk about us having specials at the beginning of year and sort of filling the bucket refunding you're going to see, we're hoping a more level growth in deposits. We're trying to manage the cost and not really go after specials as much but have more native relationship kind of pricing.

[John Connerton:]

Just add to that, I think the impact of the municipality seasonality is significant there meaning that we did have positive deposit growth during the quarter. And I think as far as the loan to deposit perspective if we normalize that municipality our loan o deposit ratio would have come down. But to David's point that growth we had there in the quarter even the CD growth was at a much more manageable cost of funds increased rate and we would expect that going forward in the quarter -- in the next quarter.

[Alex Twerdahl:]

Great. Thanks for taking my questions.

[Operator:]

[Operator Instructions] Our next question comes from the line of Joe Fenech from Hovde Group. Please proceed with your question.

[Joe Fenech:]

Good afternoon guys.

[David Nasca:]

Hi Joe.

[Joe Fenech:]

Hey, Dave it sounds as though the slowdown in loan growth is really due to -- just to be clear -- these company specific actions you're talking about as opposed to any change you're seeing in the market backdrop. I know that you said the pipelines remain robust just to be clear is that a fair assessment?

[David Nasca:]

Yes. We're seeing good opportunity flow. We're seeing robust pipeline really the quarter would have been stronger without the rotation out of that Shared National Credit piece.

[Joe Fenech:]

Okay. And if loan growth were to pick up as you expect how should we think about the outlook for margin. I guess first in a scenario where the Fed maybe takes a pause here, and then, in scenario two, whether Fed maybe continues on a more aggressive path?

[John Connerton:]

Joe, I would, we kind of communicated this in the past quarters. I would say with our growth -- we're going to continue to grow our growth rate will be more of a higher single digit than a lower double digit going forward through the first quarter and really our expectation is for the remainder of 2019.

[David Nasca:]

And when we there is opportunity, Joe, if you think about the Shared National Credits versus the C&I loans that we're trying to develop a more robust marketplace for here typically smaller balances, a little more pricing power in those credits. Well, it is competitive. We are seeing a lot of opportunity as I said earlier, but you'll see hopefully some maintenance of profitability through those kinds of loans as opposed to the bigger ticket less profitable kind of portfolio.

[Joe Fenech:]

Okay. And then taking all that into consideration and then back to the question on the interest rate environment, do you think this is an environment where you can hope to hold margins stable from here?

[David Nasca:]

I think the quarters kind of shown, I think our loan yields are -- it's holding tight and actually increasing and our cost of funds, certainly the acceleration of those have come down. And we think our margin from here going forward will stabilize.

[John Connerton:]

The discussion you've had about margin growth conundrum in terms of that being a challenging dynamic. We understand that and we think growth is part of what our strategic benefit is, our value proposition, so we're going to manage head around margin, cost of funds, expenses to make sure that we can grow profitably.

[Joe Fenech:]

It sounds like you come to the conclusion that it's more of a balance between the two rather than kind of protecting margin versus continuing to grow robustly. That's fair to say?

[David Nasca:]

Sure.

[Joe Fenech:]

Okay. And then, maybe just asking the provision reserve question in another way is, is some of the thought there guys with the offloading of some of the Shared National Credits that the underlying sort of risk profile of the entire portfolio is now lower and maybe we see more reserve drawdown in future quarters or is this more of a onetime occurrence with the negative provision. And if so, kind of how do you see a more normal level of provisioning going forward?

[David Nasca:]

I think this was a unique situation, the Shared National Credits obviously do have a higher profile, its credit risk to us. But I think going forward the type of loans that were put on will be things that we've typically had in the past, so that the category of loans that we have will remain consistent. And so our provision will be more normalized and typical -- more typical that it had -- was in the beginning first three quarters of 2008.

[John Connerton:]

And I think you look at through this year, the interesting part is going to be and we're highly constructive on it. But the interesting part is, we'll be all migrating to current expected credit losses in the next year or so that'll all be part of the dialogue as we go through there.

[Joe Fenech:]

Okay. Thank you guys.

[David Nasca:]

Great, Joe.

[Operator:]

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

[David Nasca:]

I'd like to thank everyone for participating today. Clearly they said there is 85% of the people in the country are operating under less than zero degree temperatures. So we appreciate you joining us. We appreciate you having some attentiveness to our call and we look forward to seeing you at the end of the first quarter. Have a great day.

[Operator:]

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