Q1 2020 Earnings Call
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I would now like to turn the conference over to Jeff Polaski Investor Relations for Evans Bancorp. Thank you. Please begin.
Thank you Darryl and good afternoon, everyone. We certainly appreciate you taking the time to join US during these unprecedented times.
On a call today, we have David NASCAR, President Chief Executive Officer, and John Carton, Chief Financial Officer.
David and John will discuss actions, we have taken to address the Kobin 19 pandemic review our results for the first quarter 2020, and update you weren't our current situation.
And we will open the call for questions you should have a copy of the financial results were released today. After markets closed if not you can access them on our website at Www Dot Evans Bank Dot com.
Okay and you are aware, we may make forward looking statements during the formal discussion as well as during the Q1 eight these statements apply to future events are subject to risks and uncertainties as well as other factors that could cause actual results could differ from what is stated on todays 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 Exchange Commission you can find those documents on our website, where it actually see that go.
With that let me turn it over to David to begin David.
Thank you Debbie good afternoon, everyone. We appreciate you joining us for the call today.
2020 is shaping up to be a year of generational challenge that we will not forget.
Interestingly, we forever wins. This year also marks a century observing western New York as we address the unprecedented conditions that the covert 19 pandemic is caused two primary goals have guided us one maintain the safety of our associates in clients and to do our utmost to assist our communities in responding to the hurdle.
It's presented by this emergency.
You are some contingency preparation and planning and a herculean and selfless efforts of our teams have set a framework for us to provide continuous service to our customers. During this never before experienced event.
In fact, we have had direct contact with over 1500 clients and prospective clients.
Operationally this has been accomplished with 96% of our non branch personnel working remotely and the remaining 4% of approximately 10 associates working under safe conditions that do not involve client facing responsibilities.
Yes, the customer facing branch operations 15 of 16 branches are open and addressing customer needs fully drybulk windows have remained open for business and branches are offering limited appointment hours for in person meetings to continue serving our clients.
The single branch closed was in downtown Buffalo were direct customer activity had diminished a near zero its shelter in place orders were instituted.
With the stay at home orders in person transactions declined more than 66%. We've continued to service our clients through a variety of non branch and alternative channels, including mobile online banking remote deposit capture tele banking and the customer contact center customer interaction on these platforms in.
He's done a magnitude of 30% to 70%.
The utilization of other technology, including electronic signature software and do and commercial lending platform has allowed us to continue opening new accounts, including mortgage deposit and home equity and allowed us to effectively service to pay check protection program roll out by the federal government.
These platforms were priorities for us this year prior to the virus and we will continue to leverage them and additional systems implementations to officially service clients digitally.
This is been critical given the New York mandate for businesses to implement work from home policies since March 22nd.
We believe operational consistency for our customers melody did the investments we've made to build out capacity and is a testament to the strength of our information technology plan and I T staff.
Well this operating environment is certainly a typical of our relationship oriented personal approach. We believe existing operations are resilient and 'cause sustainably perform in this environment.
Additionally.
There are views that the acceptance by customers are these technologies has been advance significantly. It. This time stay at home orders are expected to continue through may 15th in the state of New York with phasing in processes being developed.
Technology has been instrumental in navigating the changing situation. However, our best tool has been proactive communication with our clients.
It's the situation evolved and became more severe in the latter half a march our relationship managers began reaching out to our commercial clients within a week, we had touch base with every commercial relationship.
They're supposed to be for any of the federal assistant program assistance programs were finalized or the full restrictions were imposed by the state.
We created a communication aligned with our clients to help them understand what we could do for them and in turn help us understand the impact to their businesses as the situation unfolded.
Since late March we're proud to have interacted with over 1500 borrowing clients in prospective clients and estimate we performed more than 3000 direct contacts.
We have customers, whose industries were brought to a standstill or supply chains broken such as hotels entertainment the personal service industry certain restaurants and some manufacturers.
Quickly responded to those who requested deferred loan payment options for 90 days in order to help our clients cash flow strains and meet mandates John will provide more detail on the level in categories are these requests during his remarks.
[noise]. We're also for active in communicating updated guidance on the government's paycheck protection program as it was rolled out.
We were able to process and secure funding for 616 P.P.P. loan requests in phase one of the program, which amounted to approximately $140 million or 77% or the request we received before the funding was exhausted.
This level of activity equates to two plus years of gross completed in just 13 days.
The average loan size was approximately $220000 and we estimate that more than 17000 jobs should be retained.
A new round of stimulus funding was recently announced for the second phase of the P. P. P and we have an internal Q to assist with remaining and new requests in total as of today. There are 500, maybe P. P. P loans guaranteed in our pipeline representing approximately $40 million.
When totaled up for two phases, that's almost 1200 applications and guarantees received and over $176 million in loans provided.
Well dealing with this incredibly demanding environment and the associated challenges. We continue to successfully moved forward with the work required to consummate our acquisition of Fairport savings Bank.
We receive regulatory NFS be shareholder approval and look forward to a close date in just a few days on May Onest, which is Friday.
We're working closely with Fairport and expect a smooth integration.
We are anticipating and looking forward to welcoming their clients and associates to Evans and leveraging our combined strengths to successfully navigate this pandemic and set the stage for long term growth benefiting all stakeholders clients the community associates and shareholders before turning it over to John.
I will briefly touch on some of the highlights from the first quarter keep in mind that the first quarter, except for the last few weeks was more indicative of where we thought the year was going to progress too.
Obviously, the scenario changed dramatically in the latter half of March.
As you might expect we took a very significant provision for loan losses in the quarter of $3 million.
This reflects the dramatic change in the economic environment and condition of our customers markets and expected unemployment in the region.
What we hope, which we hope will be offset by the positive impact generated by federal stimulus programs.
The increase in noninterest expense for the quarter, primarily reflects a 9% increase in salaries and benefits as a result to the investments, we're making and personnel to address our strategic growth plans.
Seasonally be seasonally higher benefits expenses and increased merger related expenses.
Total assets increased 4% since the end of 2019 as result of solid loan growth in the quarter.
Additionally, deposits grew 5% in the quarter against 2009, <unk> 20020, Nineteens your end.
Where we are today's of more importance to you into our future.
Our loan portfolio represents greater risk. They did just eight weeks ago. We are actively engaged in federally funded programs that will support our borrowers and balance sheet.
Let John cover more the details on this.
I normally thankfully the efforts of our associates each quarter as it is there resolve that drives our success. However, this quarter. It is hard to express with words, they appeared a depreciation for their dedication during this time.
Commitment straight caring and bravery or a few words that can best described the efforts I've witnessed each and every associate continues to inspire me daily 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.
Thank you David and good afternoon, everyone as David mentioned, there were a couple of items that impacted our first quarter results. The most significant being the elevated provision for credit losses.
As a result, net income was 0.2 million or four cents per diluted share compared with 3.7 million or 75 cents per diluted share in last years period and the linked quarter.
Net interest income increased 2% year over year, reflecting growth in our commercial loan portfolio.
With that growth has been muted by declining your loan yields.
As a result of the repricing of the variable rate loans tied to our prime rate as the fed funds rate was significantly lower to zero percent in the first quarter.
The net interest margin was 3.64% down three and 15 basis points from <unk> and down 15 basis points from a link fourth quarter and 2019 first quarter respectively.
We are continually looking to improve our asset mix and focus our pricing discipline on areas, where we have the ability to reprice, while limiting any lost a core relationships as we discussed on last quarter's call. We expect to regain some pricing power with repricing over the coming quarters as our CD portfolio as a duration of under one year.
Therefore, we expect the margin to stabilize at current levels, but keep in mind, there could be some unforeseen moves by the fed and the impact from the P.P. portfolio is not yet known given the potential amounts that may not be forgiven by the from government.
The $3 million provision in the quarter includes a 2.2 million dollar reserve build in response to economic terms and conditions. While the remaining provision was due to an increase in specific reserve levels on strong loan growth and impaired loans.
In a moment I will touch on the details around loan modifications and then and industry makeup.
Noninterest income for the quarter was negatively impacted 0.6 million due the timing of an investment in a historic rehabilitation tax credits. The other main variance year over year was when other other income line, which saw a reduction in the fair value of mortgage servicing rights and lower transaction based interchange fee income.
Noninterest expense were up over the prior year first quarter and linked fourth quarter, largely due to higher salary and benefit costs, given our growth and the impact of seasonally higher benefit expenses. The first quarter also had elevated professional service fees, which included.
0.5 million in merger related cost associated with the FSP acquisition.
We're expecting to incur the majority of the additional merger related costs in the second quarter [noise].
The effective tax rate for the quarter was 16.7%, reflecting the historic tax credit transaction.
Absent that tax credit the rate was 25.4%.
At this time, we do not anticipate additional historic tax transactions this year.
Turning to the balance sheet.
The loan portfolio increased 61 million or 5% since the end of last year's first quarter, largely reflecting growth within our commercial real estate portfolio.
During the recent first quarter loans were up $20 million, which equates to an annualized rate of 6%.
The rate of growth was driven by our commercial real estate portfolio. It is important to note that we have not seen a jump in lines of credit being drawn down as those balances have been relatively consistent.
Given our team's focus on the P. P P and deferrals as well as the changed operating environment for perspective bars, our commercial loan pipeline, while healthy is not as robust as it has been during 2019.
From a credit risk and loving perspective, we have been proactive in working with clients and taking actions to identify and assess cobot 19 related credit exposures.
Based on asset class and bar type.
As part of that our allowance to loan ratio did increase to 1.46% in the first quarter.
We have determined that about 29% of total credit commitments could potentially be at risk with the bulk of those in hotel construction retail accommodation foodservices and retail trade.
No specific related credit impairments were identified within our investment securities portfolio during the first quarter.
During the quarter, we implemented a customer payment deferral program to assist both consumer and business bars, who indicated they may be experienced financial dip a financial hardship due to covert 19 related challenges.
Through April 28, 2020, we granted payment deferrals for up to three months.
216 for consumer bars at 15.9 million in 186 business bars, representing a 355 million subset of the company's commercial portfolio.
We do anticipate receiving financial hardship payment deferral requests throughout the second quarter of 2020.
Even Evans has sufficient liquidity resources and is well positioned to fund future balance sheet growth, including its current loan pipeline potential advances on undrawn lines of credit and pending PPP loans.
Total deposits grew 60 million or 5% in the corridor and were up 52 million or 4% from the end of last year's first quarter, we've seen growth in all major product lines with the exception of time deposits.
Total average demand deposits were 282 million for that for the two for 2021st quarter, an increase of 16% year over year.
At quarter end the bank at 52 million in available cash total borrowing capacity the federal home loan Bank was 201 million and if needed the investment security portfolio has 67 million of elsewhere pledging.
In total these sources of immediate liquidity exceeded $300 million.
In addition, the bankers operation operationally prepared to utilize federal reserve borrowings collateralized VIP SP, a guarantee PPP loans put forth to support funding of Pvp closings and immunized bank capital positions.
Operationally, we will continue to adapt to changing market conditions.
We will remain focused on assuring the response to deposit need assisting bars that experienced financial hardship with payment really clothing and funding PPP loans and maintaining service standards in our financial services business.
That concludes my comments. So we will now we'll like to open the line for questions.
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Our first question is coming from the line of Joe Fenech How group. Please proceed with your question.
Afternoon, guys.
Hey, Joe Hi, Joe.
Hi, David do you guys already carried a higher than average allowance. So just yeah. What this boost now so almost one of the half percent.
Would you consider this to be a sort of a quote unquote got it all type of provision or you participate more to calm as more information.
Emerges just kind of looking for the specifics of what your base reserve build on and this particular quarter in the first quarter.
Oh I'll answer it and then I'll ask for John to chime in but I.
I don't think we're exactly sure what to expect for the next couple of quarters. It depends on the duration of the event it depends on how the borrowers come out of the event.
We think with what we know now we have you appropriate level of reserve.
Can I guarantee you that we won't have more reserves are going forward I I can't John went through the numbers on the deferrals and.
We talk to you about how many P.P. loans, we have it's pretty significant damage that we see out there and again I I've been telling everybody. It depends on the duration of the event, but the the the build right now as John mentioned, you know 2 million or that was related to economic conditions that we.
We see unemployment.
Some qualitative factors that we look at a economic strength or lack thereof. So.
That's kind of my answer I don't know John do you Yeah, Joe I think David mentioned it anymore. They push a you know we we have a qualitative component to our our model and part of that is the unemployment and that that metric just pushed us to the point, where we you know what's inherent in our portfolio based on those outside metrics.
Reflective in that about $2.2 million of additional reserve.
Specifically for it but for the event.
Okay. That's helpful and then that's not theater correct.
Hey, Joe is I think we felt that we were going into this with a strong credit footing in terms of our belief that we were prudent in our underwriting or I mean.
We keep looking at this and not sure as to again, if the durations longer and businesses get hurt because it's it's close longer certainly New York is had worse experience than many other states. So they're reopening might take a more of a delay so that would impact.
Those kinds of results.
Okay, No fair enough and then for the FSP transaction any changes or that you're thinking about or that we should be aware of relative to the projections you offer when the deal was announced no. Obviously the world has changed and then secondly has FSB been active with the P.P.P. program.
And any.
Any statistics that you have on what they funded to date.
I can I can do that because I've been keeping track of that Joe This is Dave.
So the first question first we don't we expect that they will continue to push forward with a that about the deposit.
Projections that we have we think a it'll be a little different in how we go at the market because were socially distance, but we think we can still.
Make an impact in that market number one number two part of the reason we acquired that company was their strength in mortgage and we are seeing with rates, where they are a tremendous growth in their pipeline and our pipeline.
So those projections actually may exceed what we planned in terms of the asset side and in terms of the P. P. P account. They had limited commercial exposure they took care of their clients because they weren't a big SP a lender going into this I think they did.
19 or 20.
Clients, which is a fair amount of their commercial book and they really didn't reach further than that because they were really handle and everything pretty manually and again in terms of the dollars I don't know what that.
That dollar amount was.
Okay. Okay, and then maybe for John I'm, sorry can you help us out with some of the a I know you know it looks like the deal FSP is going to close kind of around the midpoint of the quarter a little bit before but can you help us out in terms of kind of run rate expenses or any type of a help on.
Kind of where you settled out on tangible book value per share in terms of the impact there's any changes there and then I guess the margin outlook for the combined company no lot of questions. There, but just you know with the margin, especially given all the moving parts with interest rates and then with the deal any help there would be helpful.
So our I mean, our original cost saves as well as a expectations haven't changed at this point, Joe our tangible look hasn't changed and as far as the margin.
You know again to David's point, they they have a there the biggest part of their book is a resident residential portfolio now there has obviously, there's some prepayment speeds going on in there, but they also have a large CD book.
That we've we feel as a pretty low duration as ours does so I think between the two you know we're looking forward and we think.
Our outlook net interest margins going to be lower just in general because they have a lower they have a lower margin. If you apply to ours as we had talked about during the acquisition timeframe frame, but we don't see it really impacting our our projected margin that we had originally.
Okay, No very helpful. And then last one for me guys on PPP Kinda industry generalization that then I've been kind of using for modeling purposes is about a 3% net yield on the overall balance of funded PPP loans, and then assume 70% to 75% up or the balances for.
Given which means it gets pulled into income this year.
Is that kind of a fair way I'm not asking you for prediction on how it turns out for you guys. Specifically that you think that's a fair reasonable way to look at it in terms of modeling.
I think I.
I think that 3% is a fair number I don't.
I can't put a handle on 75% forgiveness, but that sounds reasonable as an assumption I would also say.
The one thing that you.
Have not computed is there is an agent fee that can be in there that is being debated right now with the accounting community.
To the extent they helped.
Anybody putting applications they are arguing that.
There is some fee.
That was computed into the P. P P. The cares Act and.
How that gets recognized.
Whether that comes out of the 3% there is some argument right now a forgiveness part is not fully defined yet but.
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The base assumptions that you came up with 3%, 75% seem reasonable I don't know if that 3% takes a little bit of a hair cut because of the agenting fee.
Of accounts that help put applications together or whatever so that's the only caveat there.
Okay fair enough. Thank you guys.
Thanks, Joe [noise].
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[noise] [noise] there are no further questions at this time I will now turn the call back over to management for any closing remarks.
Alright. Thank you Darryl this is Dave me ask again.
Looking forward, there's many unknowns to count, but I feel confident her ability and agility to manage through various developing or unexpected scenarios I'd like to thank you all for participating in our teleconference. Today. We certainly appreciate your continued interest and support.
As we always say, please feel free to reach out to us at any time, we look forward to talking with all of you again in July when we report our second quarter 2020 results have wonderful day keep your families and yourselves safe as we go through the rest of this health crisis. So thank you very much.
That concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a grading.
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