Evans Bancorp, Inc.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Greetings, and welcome to the Evans Bancorp First Quarter 2017 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] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Deborah Pawlowski, Investor Relations for Evans Bancorp. Thank you, Ms. Pawlowski; you may begin.

[Deborah Pawlowski:]

Thanks, Bob; and good afternoon, everyone. We certainly appreciate your interest in Evans Bancorp and your time this afternoon. On the call today, we have David Nasca, our President and Chief Executive Officer; and John Connerton, our Chief Financial Officer. David and John will be discussing the results of the first quarter and they will also review the Company's initiatives and progress in our markets and strategies. You should have a copy of the financial results that were released today after the market closed. And if not, you can access them on the Company's 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 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. They can be found on our website or at sec.gov. So with that, let me turn it over to David to begin. David?

[David Nasca:]

Thank you, Debbie. Good afternoon, everyone. As you may have probably read from our news release this afternoon, the Company posted record net income of $3.1 million this quarter, up 84% from last year's first quarter. This resulted in large part from the historic growth in loans in 2016 and the corresponding net interest income generated by the larger portfolio. In addition, we benefited from increased interest rates as the Fed moved in response to current economic factors. We welcome economic indicators which suggest confidence among consumers and business leaders, and remained focused on the execution of our strategic priorities to capture business in these improved environments. Key components of that strategy are growing commercial business lines in banking, insurance, government services and employee benefits segments. Results of this quarter highlighted those efforts as insurance services and fee income increased 24% from the prior year period. In addition to the progress in insurance, as a component of that business line, we've added new talent and leadership focused on growing our employee benefits business in future quarters. That leadership is already providing results with the capture of nine new large group accounts with 07/01/2017 renewals. After delivering record performance in 2016, the rate of commercial loan growth slowed during the first quarter, including some above trend payoffs. We have, however, built a strong and growing pipeline of business, while seeing improved quality metrics and expect recent loan growth trends to resume for the remainder of 2017. A portion of that pipeline continues to be from opportunities provided by the disruption from the KeyBank, First Niagara combination. Our expectation is that, we will see additional opportunity as KeyBank performs annual reviews for the first time on former First Niagara customers. Another key component of our strategy is optimizing technology. During the quarter, we converted our customers into a new online banking platform on the heels of last year's core system conversion. This platform provides expanded self-service capabilities, added security, a more user-friendly design, and bill payment improvements, such as payment reminders. As part of our strategic plan, we're also focused on strengthening operations and risk governance as our financial institution continues to move to the next level of size and sophistication. As of June 1, we will be adding a new Chief Risk Officer to our ranks. This individual was a partner in KPMG's Buffalo office, has significant financial institution experience and was viewed within the accounting firm as a subject-matter expert in risk management. We're also adding two new members to our Board of Directors tomorrow

[John Connerton:]

Thank you, David; and good afternoon, everyone. First quarter net income grew 84% to $3.1 million or $0.66 per diluted share from 1.7 million or $0.40 per diluted share in last year's first quarter and was up 35% from the trailing fourth quarter of 2016. As David noted, the strong performance from each comparative period reflects higher non-interest income and net interest income along with lower provision for loan losses. Return on average equity was 11.59% compared with 9.70% in the trailing fourth quarter of 2016 and 7.43% in the first quarter of 2016. Our efficiency ratio measurably improved to 68.6% compared with 74.2% in the fourth quarter of 2016 and 75.8% in last year's first quarter. Looking at the balance sheet, total loans grew 3 million from 2016 year-end, that was up a more substantial 149 million or 19% from prior year's first quarter. Commercial loan efforts in late fourth quarter and early first quarter have been focused on rebuilding the pipeline after a very strong 2016, which contributed to lower closed originations in the first quarter. In addition to the reduced production, a couple of pay downs of larger relationships and commercial real estate also contributed to the slower growth in loan balances. We expect stronger growth trends through the rest of 2017, given the strength of our commercial loan pipeline at the end of first quarter. Total deposits of 978 million increased 38 million or 4% from 2016 year-end and were up 129 million or 15% from March 31, 2016. Most of the deposit growth this quarter was attributed to seasonal municipal deposits, as municipalities collect the annual property tax receipts. The deposit growth since the end of last year's first quarter reflects growth across all product categories. Given the recent market disruption, the Company has maintained highly competitive savings and time deposit rates in an effort to attract new customers. Net interest income increased $0.2 million or 3% from the trailing fourth quarter, reflecting the benefit of higher interest rates and increased $1.4 million or 17% from the prior year's first quarter, reflecting strong loan and demand deposit growth during the past year. Net interest margin for the first quarter of 2017 of 3.77%, improved 11 basis points from the 2016 fourth quarter and six basis points from the first quarter of 2016. The bank loan yields have benefited from variable loan re-pricing due to an increase in the prime rate after the Fed Reserve increased its target rate by 25 basis points late in 2016 and again in March of 2017. The improved asset yields, when compared with last year's first quarter, reflect an asset mix increasingly weighted toward loans. Average loans were 89% of average interest earning assets in the first three months of 2017 compared with 86% in the prior year period. Turning to asset quality, credit improved during the quarter. Criticized loans decreased 4 million from December 31, 2016, and are lower by 7 million compared with March 31, 2016. The Company had net recoveries of 4 basis points in the quarter compared with charge-offs of 7 basis points and recoveries of 2 basis points in the fourth quarter of 2016 and first quarter 2016, respectively. Total non-performing loans were 1.30% of total loans outstanding at the quarter end compared with 1.28% from the trailing fourth quarter and 2.25% as of March 31, 2016. The current balance includes one large commercial real estate loan relationship that makes up 43% of the total balance. The $0.4 million release of allowance for loan losses in the first quarter of 2017 reflects these favorable credit quality trends of a sustained historically low charge-off ratio, a decrease in criticized loans, improvement in several impaired loan relationships, as well as the slower loan growth. Non-interest income for the quarter was up approximately 900,000 from the trailing quarter and 500,000 from the prior year's first quarter. The fourth quarter of 2016 included the impact of a net reduction of non-interest income of 0.3 million related to an investment in a historic rehabilitation tax credit. There were no comparable transactions in each of the first quarters of 2017 and 2016. The largest driver of the increase in non-interest income was insurance revenue, which was 2.2 million in the first quarter compared with 1.3 million in the trailing fourth quarter and 1.7 million in last year's first quarter. The increase from fourth quarter reflects seasonality. The increase from the prior-year period was a result of higher profit sharing revenue, of which the majority was recognized in the first quarter. Continued growth in commercial lines, insurance commissions and higher personal lines revenue and incremental revenue from the two insurance agencies made at the end of 2016. Expenses decreased from the trailing quarter by 1% or about $100,000, but increased 6% or 500,000 from last year's first quarter. The decrease from the linked quarter reflected seasonal incentive compensation accrued in the fourth quarter. The increase from last year's first quarter includes an increase in salary costs for strategic personnel hires made to support the Company's continued growth and the receipt of an insurance claim of a $100,000 in the previous first quarter of 2016 related to litigation cost recorded in previous periods. The effective tax rate for the quarter was 30.8% compared with 7.8% in the fourth quarter of 2016 and 31.9% in the first quarter of 2016. The lower effective tax rate in the 2016 fourth quarter reflects the impact of a tax credit investment transaction. The quarter-over-quarter decrease in the effective tax rate was due to a one-time increase in the value of deferred tax asset recorded in this year's first quarter. That concludes my comments for today. So I now would like to open the line for questions.

[Operator:]

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alex Twerdahl with Sandler O'Neill. Please proceed with your question.

[Alex Twerdahl:]

Hey. Good morning, guys; or good afternoon, guys.

[David Nasca:]

Good afternoon, Alex.

[Alex Twerdahl:]

I was just wondering if you can walk through some of the dynamics of the margin. I know you hit on some of them, but just maybe how much of the loan portfolio is tied to prime, what kind of lift we might see in the second quarter? If there are some other things that impacted the expansion in the first quarter here that might not be as obvious just from the high level press release?

[John Connerton:]

I think the majority of the impact is on the variable loans, Alex. And we have probably around - about a 33% or a-third of our loan portfolio is variable and the impact from the interest rates increases from the Fed are probably in the quarter, probably around 7 basis points of that 10 basis point loan yield lift. The remainder of it being some interest that we've received on some non-accruing loans that have been put into accruing loan status of the total 10 bps lift on the loan yields, and of which the loan yield obviously quarter-over-quarter is the biggest impact.

[David Nasca:]

Another thing I'll remind you of, Alex, and you know this, but I'll just restate it. As John mentioned, 33% of the portfolio is newly booked, if you will, but also if you look at it, we have a lot of loans that have five-year resets on the pricing. So while they might not be variable, their five-year fixed rates such that they roll over 20% a year and we're booking those at higher interest rates because of what happened as well.

[Alex Twerdahl:]

Okay. And then also to that point on the new production that you're expecting, what's in the pipeline right now? Are the yields on that production going to be above the current book yield? Will you see a little bit of overall yield deterioration from the new production?

[John Connerton:]

No. We should probably see a slight lift from the new production over the current book yield.

[David Nasca:]

I think, I'm going to throw one fastball in there too. There is two things going on here. I think we'll see a little bit higher yield as John mentioned, but we're also fighting some competitive pressures right now in that with rates going up a little bit, margins are coming in a little bit. As other banks, we've had four or five banks announced their entry into the marketplace, we don't think that we're going to lose a lot of ground on that, but the margins are a little tighter with rates up.

[Alex Twerdahl:]

Okay. So we should see a little bit of NIM expansion in the second quarter from the March hike and they said they'll start the prime, a lot of the stuff is coming on the books should come on higher or at book yield, so that bodes well for the margin, but maybe not - might not see as much expansion as we would in an environment where there was less competition. Is that a fair way to put it?

[John Connerton:]

Yeah. That's a good summary.

[Alex Twerdahl:]

Okay. And then just moving over to the fee income and the insurance revenues with the acquisitions that you made earlier in the year. Can you help us get a little bit more or give us a little bit more insight into sort of the quarterly trends for insurance? I know it's going to be pretty choppy in the first quarter and it's usually seasonally much stronger, but should we be looking for the second quarter? Should we be modeling it over the second quarter of last year or should it be closer to the first quarter of this year?

[John Connerton:]

So, just pulling back to the first quarter kind of break out the increase in the non-interest; obviously, all of it, most of it's in the insurance revenue, two-thirds of that increase is due to the profit sharing, which most of that comes in; if not, probably 80% of that profit sharing comes in in the first quarter. So that variance delta will not continue through the rest of the year. The other increase, the other third of the increase quarter-over-quarter, we expect that to stick for each of the quarters going forward as it's due to core business aggregation and increase.

[David Nasca:]

Yeah. Let me get a little more detail on that if I can, Alex. Profit sharing is up over last year. Most of it happens, as John said in the first quarter, we will see some in the late third quarter, early fourth quarter. But the other lines of business; commercial lines are up, personal lines there those two acquisitions we talked about, there are thousand new customers, roughly 300,000 in additional income, but that portfolio has been kind of flat over the last couple of years. The claims business is up a touch from where it was last year and employee benefits is up. So the component pieces all are up a bit. I wouldn't say profit sharing was a huge piece of this thing though. So when you're modeling second quarter, I won't tell you how to build your model, but you asked will it be up a little bit quarter-over-quarter? We hope so, but profit sharing isn't going to be the driver of that going forward.

[Alex Twerdahl:]

Okay. And when you say quarter-over-quarter you mean second quarter '17 over second quarter '16, correct?

[David Nasca:]

Yes.

[Alex Twerdahl:]

Dave?

[David Nasca:]

Yes.

[Alex Twerdahl:]

Okay. Good. Fantastic. And then just, the tax rate for the remainder of the year, John, if you don't mind?

[John Connerton:]

Sure. Yeah, I think - I refer to the benefit that we took by increasing our deferred tax assets that obviously won't continue going through the rest of the year. So the first quarter of 2016 would be more typical of what we would expect going forward unless we benefit in a particular quarter from the historic tax credits opportunities, but those do - those come in - their transaction also, what quarter they come in can be a little - we may not know what quarter those come in. But we do expect to do a couple of those through the rest of - the remainder of the year, but the base effective tax rate is closer to the 33% or 34%.

[Alex Twerdahl:]

Okay, great. Thanks a lot for the color, guys.

[David Nasca:]

Thank you, Alex.

[Operator:]

Thank you. Ladies and gentlemen, our next question comes from the line of Joe Fenech with Hovde Group. Please proceed with your question.

[Joe Fenech:]

Good afternoon, guys.

[David Nasca:]

Hello, Joe.

[John Connerton:]

Hi.

[Joe Fenech:]

Thanks for the color on the insurance piece. It just sounds like you're optimistic there on the outlook as you kind of think about the components. Dave, is there a real simple way to think about this as you probably do better year-over-year over the course of the year, but maybe not to the variance delta that you sort of had first quarter over first quarter of last year or could we see a significant improvement in total insurance revenues for the year?

[John Connerton:]

I think the former. The way you described it in the beginning, I think the first quarter increase with profit sharing was pretty significant. I think year-over-year you'll see improvement but not as significant as the first quarter over first quarter. So already answer is, yes. Your first - your prior way you've described it's appropriate.

[Joe Fenech:]

Okay. And then the loan growth slowdown, you talked about the payoff activity, any other elements or seasonality maybe or other factors at work there and then just I'm wondering specifically what overall production levels were in the first quarter relative to the fourth quarter?

[David Nasca:]

I would suggest that production levels were fairly flat and they were offset by those payoffs we've talked about. What I would say to you is, we had significant closings in the fourth quarter. I won't say they emptied out the pipeline, but it muted any growth as closings, got pushed hopefully into the second and third quarter, because we had a lot of closings in the fourth quarter.

[John Connerton:]

I'd say - the only caveat to that, I would say, or addition, add-on is, we did have line the credits fourth quarter to first quarter, where it did trailed down a little bit, which we've seen in the past. So, it is a little seasonal.

[David Nasca:]

Yeah. The commercial customers window dress their balance sheet at the end of the year, so we see less borrowing and sometimes more deposits holding just to dress up their balance sheet.

[Joe Fenech:]

Okay. And then, how would you say - you said pipelines are strong, how did they look now compared to how they looked in some of the stronger quarters last year. Just trying to get a sense to scale the opportunity relative to what you saw last year.

[David Nasca:]

I would categorize it as, our current pipeline is as good as some of our best quarters last year.

[Joe Fenech:]

Okay.

[John Connerton:]

Another way to say this is historically significant.

[Joe Fenech:]

Okay. And then, I know Dave you said margins tightening a little bit here, but you didn't really talk about whether that was asset or liability side, I'm guessing both. You guys are able to hold the line pretty well on funding costs in the first quarter. Some banks have talked about, maybe, having changed the rate after the Fed - changing rates a little bit on the deposit side after the Fed move in March, how do you guys thinking about funding costs specifically from here? Are you able to still kind of hold the line, you think, or did you mean supply to deposit pricing pressure as well as on the asset side?

[David Nasca:]

Let me be a little finer on the definition just so I don't mess you up here. What I was talking about when I was saying that was, specifically the asset spread. So rates have gone up, we spread over the FHLB cost of funds, those spreads have tightened a bit from where they were, let's say, early last year, that was one thing. With respect to the deposits, we are not seeing significant increases in our pricing nor in competitor pricing in this marketplace. In addition to that, we have been successful in growing, sort of, core non-interest checking deposits with our commercial loan growth. And on top of that we've grown municipal deposits which are going to be at a better price point than even some of our consumer deposits we expect.

[Joe Fenech:]

Okay. That's helpful. And the CRE concentration, guys, total capital at quarter end with the new capital in the door here?

[David Nasca:]

Above 350.

[Joe Fenech:]

Okay. And then just last one for me just more broadly. Dave, any sort of new developments to speak out with the state activity, the Buffalo Billion et cetera and Western New York?

[David Nasca:]

Yeah. I would characterize that as the Governor included in his fiscal budget, which was approved about two weeks ago. Kevin, is that right? About two weeks ago, Buffalo Billion too, it is not - it's much money, I think it's more like 500 million, but they funded 43 North, which is the business capitation, they funded a Metro Transit kind of study and potential build-out of the train, the subway and train, intermodal transportation and a train station. They have funded some more foundational investments to get, maybe, a few more shovel-ready sites near the Bethlehem Steel Complex. But other than that, there hasn't been fine definition as to where those dollars are going to go yet, but they did approve the second round of that.

[Joe Fenech:]

Got it. Thank you.

[David Nasca:]

You're welcome.

[Operator:]

Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to turn the floor back to management for closing comments.

[David Nasca:]

All right. I'd like to thank everybody for joining us today. We appreciate your time. I hope you can join us in July as we report our second quarter results, and we hope that everybody has a great day today, and thanks for joining us.

[Operator:]

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