Evans Bancorp, Inc.
Q4 2016 Earnings Call Transcript

Published: 7 Feb 2017

[Operator:]

Greetings, and welcome to the Evans Bancorp Fourth Quarter and Full Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I’d like to turn the conference over to your host, Ms. Deb Pawlowski, Investor Relations for Evans Bancorp. Thank you. You may begin.

[Deborah K. Pawlowski:]

Thank you, Matt, and good afternoon, everyone. We certainly appreciate you taking the time to join us this evening and your interest in Evans Bancorp. 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 fourth quarter and the full year of 2016, and they will also review the company’s initiative and progress in our markets, our observations in their 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 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 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 Web site or at sec.gov. So with that, let me turn it over to David to begin. Dave?

[David J. Nasca:]

Thank you, Debbie. Good afternoon, everyone. For those of you new to Evans and as this is our first investor call, I’ll probably share a little more today than we will share in future calls, but I’ll share that we are a community-based diversified financial services company providing banking, insurance, and investment services in Western New York, in and around Buffalo, New York. We were founded in 1920. We have 14 branches and seven insurance offices. In 2016, the company took advantage of and continues to see building momentum, allowing acquisition of new customers driven by market disruption from the KeyBank, First Niagara combination and our own enhanced position in the marketplace. 2016 saw our deposit base grow 17% and our loan portfolio 22% across all categories. Additionally, our commercial loan portfolio grew 24% or $147 million, and we continue to diversify from our already strong commercial real estate book with C&I growth of 37% over the prior year. Some have asked us about our CRE concentration, our commercial real estate concentration, and I can respond that our regulators are comfortable with our position due to the following. One, the market is stable and does not experience significant failure fluctuations in Western New York. Two, our risk control and mitigants are deemed appropriate for the risk taken. And three, our lenders and credit folk are seen as having demonstrated significant market knowledge in commercial real estate. While we have achieved significant growth in loans and deposits, only about 30% can be attributed to the disruption from the KeyBank, First Niagara combination. The rest has been solid organic market capture from other competitors reinforcing our business model and approach. Some other major highlights over 2016 included; in May, Evans opened its first financial center in Niagara County, further expanding our footprint in the region and providing full service financial opportunities in an area that was originally the home market of First Niagara. Within our insurance business, which provides almost 60% of our non-interest income, we experienced 5% growth in our commercial lines business as a result of recruitment of newer producers over the last couple of years. Personal lines by contrast continues to experience headwinds and was down over 2%. To combat this, the company successfully acquired two small personal lines insurance agencies at the end of the year that are expected to drive about 300,000 in additional revenue and add another 1,000 customers to our insurance business. One of the agencies in Niagara County will additionally expose us to commercial prospects as its owner is the head of the industrial development agency, and will join us as a part-time producer. Finally, the bank converted its core banking technology system in 2016 replacing a 25-year-old proprietary system with a new platform to facilitate Evans’ continued growth and its increased sophistication necessary to create competitive advantages into the future. All of these factors enabled us to have a successful follow-on capital offering which netted us $14.2 million in a January overnight direct offering. This offering went off overnight after market closed at the last quoted price of $35 with no discount. Additionally, we added 11 new institutional investors to our roster at that time. With that, I will hand it over to John Connerton, our CFO for highlights of our fourth quarter results.

[John B. Connerton:]

Thank you, David, and good afternoon, everyone. Fourth quarter net income grew 33% to 2.3 million or $0.53 per diluted share over prior year’s fourth quarter and grew 6% over the linked quarter. As David noted, our strong results for the quarter were driven by continued growth in net interest income and the net positive impact from historic tax credit investments. These positive variances were offset in part by lower insurance service and fee revenue and higher expenses that were mostly related to annual incentive compensation accruals. Net interest income increased $0.3 million or 4% from the trailing third quarter of 2016 and $1 million or 11% from the prior year fourth quarter, reflecting strong loan and demand deposit growth. On a spot basis, loans were up $30 million from the linked third quarter reflecting strong commercial loan growth. Commercial loans grew 19 million in the quarter, reflecting 9 million and 10 million of growth in CRE and C&I, respectively. Deposits grew 42 million or 5% during the fourth quarter, which is the equivalent of 19% annualized growth rate. The biggest component of deposit growth in the fourth quarter was an increase in time deposits of 23 million. Our net interest margin was 3.68% for the fourth quarter. This is in line with the past three quarters as our margin has stabilized. A shift in interest-earning asset mix over the past year more heavily weighted towards loans and securities has offset continued downward pressure from asset repricing. As we move forward in 2017, after our recent capital raise, the interest-earning asset mix could more heavily weighted towards investment securities as we look to put our capital proceeds to work in various asset classes. By their nature, loan originations obviously have longer lead time than security purchases. Turning to asset quality. Credit has improved during the quarter. Nonperforming loans are down $3 million during the fourth quarter and are now 1.28% of total loans compared with 1.68% at the end of the third quarter and 2.0% at the previous year end. The current balance includes one large commercial real estate loan that makes up 46% of the $12 million December 31st balance. Charge-offs remain low at 7 basis points for the quarter and 2 basis points for the full year. Provision for loan losses of 371,000 outpaced charge-offs and the reflection of the loan growth during the fourth quarter. Allowance for loans to total loans ratio had a slight decrease to 1.48% from 1.50% at the linked third quarter. Our allowance to total loans ratio remains above peer averages mostly due to the higher percentage of commercial loans the bank has when compared to peers. Non-interest income for the quarter was down from the linked third quarter by approximately $700,000 and from prior year’s fourth quarter by about $300,000. This was the result of the impact of historic tax credits and a decrease in insurance revenue. Our quarterly insurance revenue was seasonal. Insurance revenue was 1.3 million in the fourth quarter compared with 1.9 million in the third quarter of 2016, and 1.6 million in the fourth quarter of 2015. The strongest quarter of the year is typically the third quarter due to renewals in our commercial lines portfolio, while the fourth quarter is typically the low quarter for the year. Revenue was down from last year’s fourth quarter as our insurance claims business and financial services revenue continued to struggle. The claims business results can vary year-to-year based on loss events, and 2016 was a down year due to fewer insurance claims. Financial services revenue growth has been challenged in 2016 in an extremely competitive environment. We typically participate in one or more tax credit investments which reinvest dollars into historic structure projects. Accounting for the investment impacts, a few lines on the income statement. The overall bottom line impact was a positive 300,000 for the quarter. The net negative 300,000 impact on non-interest income for the quarter is a combination of the New York State credit and the impairment loss on the investment, offset by an approximate benefit of 600,000 in the income tax provision line. Excluding the impact of the historic tax credit transactions, the total year effective tax rate would have been 32.7%. Expenses increased from the linked quarter by 5% or about $400,000 and 6% or about $500,000 from last year’s fourth quarter. This was mostly a result of personal costs and technology expenses. The company’s salary expenses increased due to recording additional incentive compensation accruals in the fourth quarter related to employee performance for full year 2016. This amount constitutes just about the entire increase in salaries and benefit expense and will not be reflected in future quarters’ normal recurring salary expense. Technology expenses increased about 100,000 in the fourth quarter when compared with the third quarter of 2016 and last year’s fourth quarter, due to maintenance costs for the company’s new core banking system. That concludes my remarks on our fourth quarter results. I will now turn it back to David for his reflection on our company’s future opportunities.

[David J. Nasca:]

Thanks, John. As I mentioned, more to get a level set than anything, I’d like to provide a strategic outlook which includes our strategic plan. As noted, 2016 was an excellent year of solid execution and the capturing of market opportunities, which we feel will platform our organization into the future as we pursue a strategic plan aimed at delivering transformative growth, operating scale and enhanced returns for our shareholders. In 2016, we entered into a new strategic plan designed to position Evans competitively as the financial institution of choice for our clients and target markets. The major tenants of the plan include organic market growth, market disruption, retail evolution, fee-based income growth, capital management, talent acquisition and retention and IT optimization. And I’ll give you a brief snapshot of each of those. With regard to our organic market growth, we’re leading with our business product set. We intend to grow and diversify the commercial loan portfolio, expand our commercial lines insurance and increase our small business relationships. This is the major driver of our engine. With regard to market disruption, the Western New York banking landscape has changed with KeyBank’s acquisition of First Niagara and Northwest subsequent purchase of 18 former First Niagara branches along with some additional new market entrants. We will take full advantage of this market disruption by offering our community-based and consumer-focused approach as a better alternative to bigger banks. We intend to transform our delivery and retail channels by adding new technology to streamline and centralize operations, realigning staff roles and responsibilities and concentrating our efforts on customers and expansion. With respect to fee-based income growth, we’re growing our non-interest income and it’s of extreme importance to us as this source of income has declined in recent years due to regulation and consumer behavior. Cash management services and increased insurance revenues, including employee benefits, are paramount to reversing this trend. With respect to capital management, we’re focused upon managing our balance sheet. You saw that we just acted with the capital offering that we made and we’re preparing and optimizing our capital base and utilizing our excess liquidity. Talent acquisition and retention is about attracting and retaining talent needed to deliver the strategic plan, transforming traditional talent management programs and increasing leadership and accountability to deliver better results. Additionally, with the exit of First Niagara from the market and larger financial institutions leaving the municipal business, the ability to garner significant low-cost deposits along with a number of cross-sell opportunities, including insurance and cash management, presents itself. Evans has established a government banking department and hired a very experienced director of government banking to grow this new line of business. This should enhance our funding and cost to funds at a time when our growth in assets has been extensive. That concludes my comments for today. So I’d now like to open the lines up for questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Joseph Fenech from Hovde Group. Please go ahead.

[Joseph Fenech:]

Good afternoon, guys.

[David J. Nasca:]

Hi, Joe.

[John B. Connerton:]

Hi, Joe.

[Joseph Fenech:]

David, in terms of the drivers of loan growth, you alluded to this in your prepared remarks with about a third – I think you said 30% roughly coming from market disruption. Can you talk about the other two components? You made a bunch of enhancements to your infrastructure in terms of both personnel and just systems in the last couple of years. How much would you say is sort of due to that and then how much is sort of due to just the general favorable environment pickup that you’re seeing in economic activity in Buffalo? And then on the back of that in terms of the go forward, would that mix – is your expectation that that mix would change at all?

[David J. Nasca:]

Let me answer it this way, Joe. I think I can’t attribute specific amounts to the investments we made in people, but the investments in people were made to take advantage of what we believe was a developing economic environment, number one, and the disruption, number two. We still maintain that we’re roughly 4% to 5% back of the envelope in terms of our market penetration on the loan side, 2% on the deposit side. And we believe that it was important with that kind of opportunity to get more boots on the street. So I would say that both of those things are drivers. I can’t ascribe a specific percentage to them. We expect the First Niagara opportunity will continue for anywhere up to another 24 months, takes folks a little longer to move their loans, deposits are a little more transactional. We think that the deposits are probably a nine-month move from here, still available, but the next period of time maybe the next up to 18 to 24 months. People are now just doing their financials. They’re getting their tax returns in. People have had enough experience with KeyCorp and First Niagara to determine whether they like the new environment. So I guess that’s a little roundabout way of saying we think it’s all those things. They’re going to lead to advantages for us. We also believe that the awareness of our company, our awareness of our brand, and our preparation for this moment happens to be hitting at the right time where there’s the opportunity. So all those things play into taking advantage of the opportunity. So I apologize that I can’t ascribe a number to it, but we think that 60% comes from that myriad of factors.

[Joseph Fenech:]

That’s helpful. Thank you, David. And then John, it was helpful, thanks for the accounting walkthrough on the historical tax credit. Could you just talk about your expectations maybe over the next several quarters? Help us out what the modeling, your expectation of what that could look like?

[John B. Connerton:]

From a perspective of the tax credit only, Joe, is what you’re asking?

[Joseph Fenech:]

Yes, just the moving parts. Like how would you expect that to sort of play out, like just sort of how you laid it out for how it occurred in the fourth quarter? And just in general terms, what should we expect to see over the next couple?

[John B. Connerton:]

What drives that is really whether or not we do anymore deals. We do have a few deals in the pipeline, Joe. I would suggest that it would probably be about the same impact. Depending on when those investments go into use is really what drives that. So I can’t particularly hit a particular quarter, but the impact for this quarter would be consistent with kind of our understanding of it going forward.

[Joseph Fenech:]

Okay. And then last one from me guys and I’ll hop out. How should we be thinking about your balance sheet positioning here going forward in a rising rate environment? And then you made the comment about increased securities balances over the next couple of quarters as you kind of temporarily put that excess capital to work. How should we think about balance sheet positioning here over the next several quarters?

[John B. Connerton:]

I think, Joe, when we look at capital raise, we’re going to put it to use within hopefully this period of time this year. Obviously, the loans will come slower than the investments that we’ve put on. The capital gives us about $130 million ability to leverage that at our rates that we think internally are appropriate. I think going forward, we’re going to take our time to put both the loans on and the investment, and it will probably be an even growth throughout the year next year.

[David J. Nasca:]

But that said, Joe, as you know we are positioned asset sensitive currently. So in a rising rate environment, if we can ladder those investments in, hopefully we’ll take advantage of some of those returns. But in addition to that, our balance sheet is structured to be able to sustain what we expect are a few rate increases here going forward.

[Joseph Fenech:]

Right, and that’s what I was getting at, David. So you still see yourself as a net beneficiary of rising rates?

[David J. Nasca:]

Yes.

[Joseph Fenech:]

Okay. Thank you, guys.

[David J. Nasca:]

Okay, Joe.

[Operator:]

[Operator Instructions]. Our next question comes from Alex Twerdahl from Sandler O’Neill. Please go ahead.

[Alexander Twerdahl:]

Hi, guys. Good afternoon.

[David J. Nasca:]

Good afternoon, Alex.

[Alexander Twerdahl:]

I was just wondering if you could – just to piggyback on Joe’s question about the loan outlook going forward, if you could just give us a little bit more color on what the pipelines might look like going into 2017, if we should expect a similar amount of growth going into the new year as we’ve seen in the last couple of quarters?

[John B. Connerton:]

We’re expecting double-digit growth for the full year, Alex. Just based on our size, I think the quarters can be a little inconsistent. So based on our size, if we have one large or a couple few large payoffs, it may make one quarter not quite as consistent with the other quarters. But I think when we look at the full year, we’re thinking double-digit growth is our expectation.

[Alexander Twerdahl:]

Okay. And then just switching --

[David J. Nasca:]

Alex, I guess I’d kick-in as well and suggest that our pipeline is good. I think we had a pretty strong amount of closings in the last quarter or last year, a reasonable amount. You might see the first quarter fluctuate a little bit from our hottest months, but we expect over the year to have similar types of growth rates, as John mentioned.

[Alexander Twerdahl:]

Okay, that’s helpful. And then just switching over to the deposit side, I think you said that there was something like – you expect a nine-month window to capture a lot of deposits. Do you anticipate running some promotions during that time or some increased marketing expense, or anything that we should be aware of when we’re doing the modeling just to make sure we’re reflecting anything that’s associated with maybe some additional marketing, et cetera, with that?

[David J. Nasca:]

I think we always look at and I think your question, you’ve asked it in the past. We typically do some things early in the year to generate some deposits. I think we still have that opportunity. We have some deposit specials running currently. That said, we also expect that that municipal deposit growth is going to enable us to not have to run up our cost of funds extensively, because we expect some growth out of lower cost deposits which is the municipal stuff. So I think we have some things going on right now. I think you’ll see from time to time if we need deposits, we can go get them. But generally we’ve also had really good growth in all the sectors, including the non-interest sectors.

[Alexander Twerdahl:]

Okay. Is the municipal business, is that off the ground at this point or is that still something that has yet to contribute to the actual balances?

[David J. Nasca:]

That’s off the ground and we should start to see some success on the first quarter here.

[Alexander Twerdahl:]

Okay. And then with the tax credit stuff that you did during the quarter, is there going to be some carry through? Assuming if you didn’t do any additional investments in tax credit items, should we be modeling a tax rate of that 32.7% that you cited or is there some additional carry through from that into 2017?

[David J. Nasca:]

There shouldn’t be any carry through from tax credits that we’ve actually booked in 2016. Going forward if we were to do one, it would be – it’s a little mismatch assuming that we take the write-off in the quarter that we do the investment and then the benefit on the tax gets spread throughout the quarters. But if you take them all out of the mix, that effective tax rate is more consistent with where we’ve been and where we would expect to be for the 32.7.

[John B. Connerton:]

And obviously the Trump effect, if there is any, in terms of tax relief is not – we don’t look at that budgeted in. That’s your call.

[Alexander Twerdahl:]

Great. Thanks for taking my questions.

[David J. Nasca:]

Thanks, Alex.

[Operator:]

Thank you. This does conclude the question-and-answer session. I’d like to turn the floor back over to Mr. Nasca for any closing comments.

[David J. Nasca:]

I’d like to thank everyone for joining us today on our teleconference. We hope you can join us in April when we report our Q1 '17 results. Thanks again for taking some time with us. We appreciate your interest in Evans. And we hope you have a great day. Take care.

[Operator:]

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