Q2 2020 Evans Bancorp Inc Earnings Call

Hello, and welcome to the Evans Bancorp second quarter fiscal year 2020 financial results Conference call. At this time all participants are in listen only mode. It's anyone's require operator assistance. Please press star zero under telephone keypad.

A question answer session will follow the formal presentation.

As a reminder, this conference is being recorded its my pleasure to trickle over to quick Mahalik Investor Relations. Please go ahead Sir.

Yeah. Thank you and good afternoon, everyone. We certainly appreciate you taking the time today join us and your interest and Evans Bancorp on the call today, we have David NASSCO, President and Chief Executive Officer, and Jack Countertenor, Chief Financial Officer, David and John will review our results for the second quarter of 2020, and then we'll open up the call for questions you should have a copy of the finding.

Actual results that were released today after markets closed if not you can access the matter web site at Evans back Dotcom.

On the web site you also find slides that accompany today's discussion. If you are reviewing those slides. Please turn to slide two for the Safe Harbor.

As you are aware, we may make some forward looking statements during the formal discussion as wells during the Q and <unk>.

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 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 and Exchange Commission you can find those documents on our website or does he see dot Gov.

So with that let me turn it over to David the again David.

Thank you Craig good afternoon, everyone.

I appreciate your joining us for the call today and hope you and your families are doing well during this most unusual period.

Before we get to the details of the presentation I'd like to take this opportunity to think are almost 400 associates for their outstanding efforts and ongoing commitment to maintaining our operations under these challenging conditions working tirelessly to support meet the needs of our clients in communities I couldn't be prouder of their dry and reach.

Oh, yes.

The second quarter presented the unique set of opportunities and challenges for Evans and for all financial institutions.

We believe our performance was solid and demonstrated the effectiveness of our community commitment and relationship Senator Folkerts centric focus despite the bottom line being impacted by elevated credit costs and merger related expenses.

We strengthen an already solid balance sheet measurably grew our deposit base and are on track with the integration of airports savings bank after closing the acquisition.

As previously announced we successfully closed on the FSP acquisition on May 1st despite dealing with this incredibly demanding environment and the associated changes challenges of the pandemic.

We felt it was important to continue closing of the transaction for a new associates to remove any uncertainty at all or most volatile and unusual time.

This acquisition added five branches in the contiguous and strategically prioritized metropolitan area of Rochester, New York.

Along with 271 million of loans and $245 million of deposits to our portfolio.

Our current focus is to deliver our combined strategy leveraging Evans commercial banking platform and strength in conjunction with FSP solid retail and consumer lending presence. In addition to expanding capabilities across the combined platform in areas such as municipal banking insurance and.

The benefits in cash management.

Our initial expectations related to operating performance are being realized in these early stages and we are ahead of schedule in terms of commercial loan talent acquisition in the market.

As we discussed last quarter, we have been supporting our clients in communities. During this pandemic through various programs or commit was happening in our meaningful participation in the paycheck protection program or P. P. P.

We were proactive in staying abreast of and communicating off changing guidance and the program is it was rolled out we were able to process and secure funding for more than 600 loan request in phase one of the P.P.P. program amounting to approximately $140 million.

That level of activity equated to approximately two years of gross completed ingest 13 days.

Phase two which was continued into July.

So a us handle another 1000 plus applications to date, we have produced more than 1700, 50, P.P.P. loans totaling approximately $198 million. The vast majority of which were produced in the second quarter.

We estimate our work helped the businesses that received these loans protect approximately $28000 28000 jobs in the communities we serve.

Noteworthy is that while we helped many existing clients navigate and secure funding for the program more than half of those served represent a new long relationships some of which had previously not been serviced or had been turned away by other banks strategically we believed that this could be an important platform an opportune.

We need to build and had relationships and our for other products and services.

We provide further details on our P.P.P. accomplishments on slide five of the associated handhelds.

We've also been working diligently with clients, who qualify for payment deferrals as a result of Tobin 19 impacts John will provide more detail in the level in categories are these requests and our expectations during his remarks.

I'm pleased to report that our portfolio continues to perform well and we expect to see a significant decrease in the number of deferrals in the third quarter.

Lastly, given the uncertainly uncertainty related to the pandemic and its impact on the economy, we felt it prudent to protect and fortify our balance sheet by raising additional capital in early July after the quarter ended.

We announced the private placement of 20 million of subordinated notes that added to our regulatory capital position and will act as a source of ongoing strength to our bank. We believe our ability to raise additional capital at this time at reasonable levels is a testament to the strength of our franchise and strategy for growth.

Well the duration of the pandemic and resulting impacts continued to be a known or more diversified platform and sufficient liquidity put us strengthened position and well situated for future challenges and opportunities.

Vince has been a consistent and stable source for financial services for our clients and communities for over 100 years.

Strong relationships in core values have guided the organization through many challenging times, an economic cycles during our history and we'll continue to lead us forward.

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 questions Jeff.

Thank you David and good afternoon, everyone has reported today second quarter net income was 0.5 million or nine cents per diluted share compared to compared with 4.4 million or 88 cents per diluted share and last year's period, and 0.2 million or four cents per diluted share in the linked.

First quarter.

The variance from the last years period, largely reflects $5 million a onetime merger related costs at an elevated loan loss provision, which reflects the continued economic impact of the cobot 19 pandemic.

Net interest income increased 14% year over year in 70% sequentially due to the FSB acquisition and higher interest income and recognize fees as a result of PPP lending.

FSP contributed 271 million and total loans and PPP lending added 195 million of loan growth during the second quarter.

Total fees paid to evidenced by the small business administration for originating and servicing wheat, PPP loans were approximately $7 million or an average of three and a half a percent of the total PPP balances. These fees will be amortized over the current 24 months long duration and as a result, we recognized approximately 600000 in fees in the quarter.

This amortization may be extended or shorten depending on whether the P.P. loans are extended to 60 months or forgiven has allowed by the legislation.

The net interest margin of 3.336% was down 28, and 51 basis points from the linked first quarter in 2019 second quarter, respectively. The current margin reflects the significant lowering of the fed funds rate in the first quarter, a lower margin on P.P. loans, the impact of the FSP acquisition and its relative.

Lower margin and finally, the significant liquidity the bank is experiencing through deposit growth the impact from the linked quarter included four basis points of compression from both PPP and FSP and 20 basis points due to the excess fed funds from the growth in deposits. We're continuing to look continually looking to improve our asset mix.

And focus our pricing discipline on areas, where we have the ability to reprice, while limiting limiting any lost a core relationships.

As we have discussed previously we expect to take advantage of repricing, our certificate of deposit portfolio, which has a duration of under one year.

Our margin has been mostly impacted by the inflow of illiquidity in the market largely from government stimulus and reduced consumer spending client behavior and utilizing these phones will drive our margin performance based on our expectations of continued elevated deposit levels. As a result of the speed of the economy opening and potential further government.

Actions, we expect our margin to compress between five and eight basis points.

Keep in mind, there could be impact from the PPP portfolio, which is still a variable given the potential amounts and timing that may or may not be forgiven by the federal government.

The $597000 provision reflects reserve build given changes in credit quality standards due to the continued impact of the cobot 19 pandemic on the economy.

Well this provision is still a elevated it is a significant improvement from the <unk> sequential first quarter in a moment I will touch on the details around loan modifications and our expectations.

Noninterest income decreased due to a decline in deposit service charges, resulting from weaker consumer spending and the temporary suspension of certain fees to assist clients affected by covert 19.

The other driver of the year over year change was lower insurance servicing fee revenue, which saw a reduction in contingent profit sharing and claims revenue.

Noninterest expenses were up over the prior year period, and the linked first quarter largely due to the addition of FSB and related merger costs.

The effective tax rate for the quarter was 16.7, which reflects the historic tax credit transaction completed last quarter absent the tax credit the rate was.

25.9% at this time, we do not anticipate additional historic tax transactions this year.

Turning to the balance sheet.

The loan portfolio increased 473 million or 39% since the end of last year's second quarter, largely reflecting growth in commercial and industrial loans commercial real estate PPP activity and the FSB acquisition commercial loans were down in the quarter when excluding PPP NFS be originations were lower than typical.

The result of the economic environment and these balances were further diminished by Paydowns in the payoff of 20 million in commercial real estate loans precipitated by low interest rates. The bank made the determination not to meet the terms on these refinance opportunities as they were outside our risk appetites.

Although lower than typical our loan pipeline is building again, and we expect growth to return in the third quarter, two an annualized rate in the low single digits.

During the second quarter, we implemented a client payment deferred program to assist both consumer and business owner business borrowers who indicated they may be experiencing financial hardship due to cold at 19 related challenges.

These deferrals at 90 day, durations, which will expire in the third quarter.

The vast majority of the deferral requests were process in April and May and at our peak, we had a total commercial loan deferrals of approximately 372 million or 37% over the total commercial portfolio, our bankers and credit risk management teams have been completing extensive <unk> portfolio reviews of these relationships focusing on a number of metrics like liquidity.

Business assumptions in collateral coverage to name a few this heightened level review will continue as we evaluate repayment risk.

With those initial deferral set to expire in the third quarter to quarter and given ongoing conversations with clients. We expect the percentage of the commercial portfolio that will be granted a second deferment to fall by two thirds to around 120 million or 12% of the total commercial portfolio with the majority centered on our hotel portfolio.

We are monitoring this group closely and see occupancy beginning to improve with the opening of the economy locally, but it is expected to take longer than other industries for further detail on our commercial loan portfolio and deferrals. Please refer to slide six and seven.

Well FSP did add 245 million of deposits. We also saw significant growth due to proceeds from PPP loans in our clients maintaining greater liquidity total deposits were up 36% or 482 million in the quarter and were up 41% or 526 million since the end of last year's second quarter.

Growth was realized in all major product lines total average demand deposits were 400 million for the 2022nd quarter, an increase of 64% year over year.

Looking forward, we're confident that we have taken the appropriate actions to remain in a solid position with a high level of capitalization to navigate this ever changing environment and are well positioned to fund future balance sheet growth.

That concludes my comments, so we now would like to open the line for questions.

Thank you will now be conducting a question and answer session. If you like to be placed on the question could you. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q.

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Our first questions plays coming is coming from our portal.

On paper stand what are your line is alive.

Good afternoon guys.

Yes.

Hey, first off just wanted to go back John to your margin commentary I think you said the breakdown was four basis points from P.P.P. for from FX, B and 20 from enhanced liquidity and the drop in a I guess, the full quarters impact and the drop rates in the first quarter and then I think you said five to eight basis.

Points, a compression expected in the third quarter.

For the for the guidance for the third quarter does that assume similar levels of liquidity that that you currently have on the balance sheet today.

Yeah, I think it you know as I suggested we think that that liquidity will continue to be maintained and you know be slightly higher than actually our average liquidity in second quarter and that'll be that's really the driver of the additional compression. So we'll have our average actuals.

Cash that will have on hand is gonna be slightly higher I'm, just due to where our spot balances ended at second quarter, We think that liquidio continue through a third quarter.

You know it'll put that was it will compress that margin. Additionally between five and <unk>.

Okay, and then you know.

With the higher average, earning assets in the lower margin as it did and I I come in.

Just a little bit in the third quarter or is it flattish or had how do you think about the and I ask each of it.

Yeah, I will be slightly up from from where we were in second quarter.

Okay.

And then how how should we be thinking about or maybe help us understand the that insurance service revenues that I'd be says a lot of volatility airline seasonality I should say throughout the years.

Throughout the year.

That was down a little bit year over year is that directly related to cope with it or is there yeah I guess, how should we be thinking at the third quarter.

For that specifically in the fourth quarter and how do you expect that line to trend going forward.

Yeah, I think are the large impact there there is where we have a small claims division that just we haven't had the activity because <unk>, that's usually variable based on whether or not there's events weather events, mostly that drive that business.

Another big impact or is the profit sharing so most of the profit sharing expectations that we had are gonna come through in the first two quarters. If there was adjustments to that so going forward. Our expectation is that third and fourth quarter will be more consistent with prior years.

Okay.

Right and then with third quarter that you need to consider though else.

The season, so if I look at third quarter 2019, that's kind of the the right starting point for Threeq you 20.

Exactly up.

Great and then.

On expenses, you get about two months of the FX being there I'm you know obviously backing out the 5 million a merger expenses.

Starting point for expenses in the third quarter, because obviously, there's some moving parts with the economy being shut down and it looks like you didn't spend as much on things like advertising well some of those line items normalize or are we going into kind of the new normal for the next couple of months says he kind of work through PPP and and.

And some other items colvin related.

I think if you back out the merger related.

There's you know two months of of Ah of FSB costs in those numbers. So it which is approximately about a million dollar. So you would assume that they'd be another half a million dollars.

Increase just based on an additional months of FSB, but other than that I think somebody elevations are were more onetime items because the cobot. It obviously, if things deteriorate up here they might it might drive our costs, a higher but we would expect that the cost stabilize.

Beyond our excluding the the FSP increase in the merger related costs.

Yes, so there's a ups and I will answer right yet.

Yep.

And then just finally as you think about the provision going forward, obviously, a big build in the first quarter of a little bit more in the second quarter.

As you kind of.

Think about the moving parts that are going to impact the reserve going forward is the biggest piece.

At this point just what happens with those deferral owns 120 million that are going to get the extension as they come off you know whether or not they migrate and cannot before me I get charged off.

Yeah, I think that's gonna be you know as this.

The economy opens back up and the success of their reopening or if it shuts back down a that'll certainly if there's more guidance a where we're there's some there's some flexibility in how we account for these you know barring that I think it's gonna be individual credits in specific.

We as we suggested looking at that hotel portfolio and how that comes back in and whether or not we think our collateralization holds which we think we have a pretty good collateralized portfolio. So that'll really tell I'm the tail as far as a third quarters provision is more specific related to individual credits.

And to ask thanks for taking my questions.

Thank you.

Thank you as a reminder, that star one could be placing the question Q1 moment. Please what we pull for further questions.

We reached one of our question answer session always turn the floor back over to management for any further or closing comments.

Alright, Thank you Kevin.

I'd like to thank everybody for participating that teleconference. Today. We certainly appreciate your continued interest in support please feel free to reach out to us at any time and we look forward to talking with all of you again in October when we report our third quarter 2020 results with that I'd say, you have a great day and stay safe and this.

Unusual health crisis that we've been facing for the last five months, so thanks for being with us.

Thank you that does conclude today's teleconference. You may disconnect your lines and have a wonderful day, we thank you for your participation today.

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