Q3 2020 Evans Bancorp Inc Earnings Call
Ladies and gentlemen, your host for today's conference call.
Hi, first demonstrate audiences.
Shortly thanks.
For your patience please remain on the line.
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Good day and welcome to the Evans Bancorp third quarter fiscal year 20, tricky financial results Conference call.
Today's conference is being recorded.
This time I would like to turn the conference over to Debra lumpy Investor Relations for Evans Bancorp. Please go ahead.
Thank you Mary and good afternoon, everyone. We certainly appreciate you taking the time today to join us and your interest in having bancorp.
On the call we have with me here, David NASCAR, our President and Chief Executive Officer, and John Carlson, Our Chief Financial Officer.
David and John will review our results for the third quarter 2020, and then we will open the call for questions.
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 our website at www Dot Evan Bayh Dot com.
On the website, you'll also find the slides that accompany today's discussion.
If youre reviewing those slides please turn to page two the safe Harbor statement.
As you are aware, we may make some forward looking statements during the formal discussion as well as during the Q and a.
It was a quite a 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 website or SBC dot Gov.
So with that let me turn it over to David to begin.
[laughter]. Thank you Debbie good afternoon, everyone. We appreciate your joining us for the call today I hope, everyone is staying healthy and safe and getting through the increased challenges posed by the pandemic.
Before we get started I'd like to take this opportunity to thank the entire Evans team for a time going African tireless commitment to continue to respond to the challenges are singularly unique and uncertain operating environment and our centennial year. This comprises all the projects, which I've been says undertaken including an.
Acquisition closed in May with computer conversion and product transition in the third quarter administrative office move PPP and mortgage operation integration and systems conversions during the height of a robust mortgage origination and refinance boom.
Our clients' needs are being met with consistent communication support and execution as we seek to them through compound business challenges.
I'm excited to announce that we officially opened the door to a new corporate administrative offices as Merck by yesterday's ribbon cutting while the current environment certainly complicated. This transition we were able to successfully consolidated consolidate all non branch associates from three offices into one during construction.
We needed to reengineer certain aspects of the building to meet new safety protocols required to deal with the pandemic and assure the safety of our associates.
Currently about a third of our work force has returned to onsite work at the new building well the remaining two thirds continue to operate remotely until at least January.
Continual assessment is being done on our hybrid model to determine changes to our operating posture or sharing the safety of our associates and clients is paramount.
Remote operations had been executed successfully since the outside of the pandemic in March and can effectively been continued indefinitely.
We do believe that the new offices will position our organization to operate more efficiently and effectively into the future while assisting in growth and the attraction and retention of talent.
Today, we reported third quarter 2020 results with net income of $4.5 million in light of the current challenges all banks are facing and actually some remaining one time merger costs. Our third quarter results were solid and reflected our agile response to the pandemic and.
Incremental business from third part savings bank and successful participation in the paycheck protection program or PPP.
Our acquisition of Fairport savings bank or FSP positions us strongly in a strategically prioritized contiguous market and we are encouraged with the progress we are making integrating the bank and new clients.
System, and computer conversion and integration work completed during the quarter with high satisfaction and retention rates.
Well overall growth in the expanded Rochester market has been somewhat muted given the ongoing challenges of in person meetings and the virtual environment in which we're operating we're working to advance our combined market strategy our.
Our commercial team in the Rochester market is now fully staffed and operational and significant inroads are being made with new relationship opportunities Weve.
We've also been leveraging FSP strong retail presence and consumer lending team and when combined with our existing Evans capabilities have successfully manage the substantial mortgage loan purchase and refinancing volumes.
The combined mortgage business provides another profit center to diversify earnings. Additionally expense management efforts related to the merger are on track.
I've been towards a major purchase spend and helping our community recover them remain resilient with its performance in the S.P.A.'s PPP program, resulting in a near doubling of our commercial lending client base. We continue to utilize P.P. as a platform to build an AD relationships and offer other products and services.
And we have focused on cultivating those relationships to date, we have successfully converted over half of those customers to more permanent status, where they are now utilizing three or more of the bank services.
Please see slide four in the third quarter 2020 financial results deck, which was included with the financials for additional details.
Looking ahead, the Western New York market area continues to recover from the cold at 19 pandemic and while we are certainly not back to normal we are encouraged with the significant drop of deferrals, which now makes up approximately half a percent of our total loan portfolio, which is a decrease of 90 per.
Sent in deferrals originated.
We believe we are appropriately reserved for the continuing economic events of the pandemic and given our strong capital and liquidity position, our well positioned looking forward with that I'll hand, it over to John Connor tend to run through the results in more detail and then we'll be happy to take questions John.
Thank you David and good afternoon, everyone as reported today third quarter net income was four and a half million dollars or 84 cents per diluted share compared with $5.2 million or one dollar four cents per diluted share in last year's period, and $500000 or nine cents per diluted share in the linked second quarter.
Included in the current results was an elevated loan loss provision of 1.9 million to reserve for a well defined weakness in the hotel portfolio and 524000 of remaining merger related cost.
Net interest income increased 15% year over year, and 5% sequentially as we recognized a full quarter impact of FSP as well as higher interest income from recognized fees as a result of PPP lending but.
The total amount of amortized TPP loan fees was approximately $900000 in the quarter. This amortization, maybe lengthened or shortened depending if these PPP loans are extended to 60 month or forgiven as allowed by legislation.
The net interest margin of 3.19% was down 17, and 75 basis points from the linked second quarter and 2019 third quarter respectively.
The current margin reflects the significant lowering of the fed funds rate by 150 basis points in early 2020, a lower margin on residential mortgages from FSP as well as PPP loans and finally, the significant increase of interest, earning cash balances due to deposit growth in total the yield on loans decreased 21 and 150.
One basis points from the linked second quarter, and 2019 third quarter respectively.
We believe our net interest margin should remain at around this level in the fourth quarter, though keep in mind, there could be some unforeseen moves by the fed and the impact from the PPP portfolio is still a variable given the potential amounts that may or may not be forgiven by the federal government.
Given our strong liquidity base, we do not we do have some pricing power on the liability side of the balance sheet. We are letting time deposits roll off and are continually looking at areas, where we have the ability to reprice, while limiting any lost the core relationships.
The increased level of provision this quarter reflects the elevated risk associated with the hotel portfolio, resulting from the continued impact of the COVID-19 pandemic and these clients our.
Our hotel portfolio consist of 15 relationships for $81 million or 6.5% of the total commercial loan portfolio.
A majority of the power of the portfolio received two deferrals of 90 days, each which have expired as these individual credits adjust their business models in response to the Pandemics challenges, they're requiring additional assistance from a bank. We're in close communication with these customers in order to determine progress or additional challenges as circumstances warrant.
The portfolio consist of limited service hotels that rely mostly on consumer rather than business customers and there is a level of a seasonality associated with their revenue stream. Therefore progress will be evident better evidenced after a full cycle, which will include summer 2021. As a result, we have risk rated these loans as criticized assets which increased.
The commensurate level of reserve, we need to hold on this portfolio.
Given the downgrade of the hotel portfolio. Our total criticized assets at quarter end increased to $133.1 million compared with 71.5 million at the end of second quarter of 2020.
Our commercial bankers and credit risk management teams have and will continue to extensively review the banks portfolios as we evaluate repayment risk is important to note that these credits have strong bars with full guarantees in their properties are in our footprint and market, which allows the bank continue a line of sight into conditions of the assets and the market and progress on perform.
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Additionally, the portfolio is well collateralized and an average loan to value ratio of 53%.
Currently the majority of the hotel loans are paying either interest only or full principal and interest.
As expected the vast majority of second quarter deferrals have moved back to normal paying status.
Since the initial deferral period, the bank allows customers to pick a second 90 day deferral period of which the majority have expired as of October Twentyth. The bank at $8 million in deferrals, which includes 4 million in consumer and 4 million in commercial loans.
A majority represent the remaining second deferrals that are expected to expire in the fourth quarter and begin payment status.
For further detail.
On our commercial loan deferrals and hotel portfolio. Please refer to slide five et cetera.
Noninterest income increased primarily due to a 600 to $667000 gain on the sale of investment securities.
By the service charges were up from the linked quarter as a result of higher consumer spending and the reinstatement of certain fees that had been temporarily suspended during the second quarter of 2020 to assist customers affected by COVID-19. So.
Seasonally higher commercial lines insurance commissions and profit sharing revenue are the lead drivers behind the increase in the insurance service and fee revenue when compared with the linked second quarter.
Noninterest expenses were up over the prior period due to the addition of FSP and the remaining 524000 of merger costs, which were largely due to the system conversion and integration being completed in August.
When compared with the linked quarter salaries would have been up to a larger degree as a third quarter included a full three months of acquired salary.
Helping to partially offset this was lower incentive compensation accruals of approximately $700000.
Additionally, I will note we are attaining the cost saves from FSP as anticipated.
The effective tax rate for the quarter was 11.8%, which reflects the historic tax credit transaction completed in the 2021st quarter.
Absent the tax credit the rate was 25.6% at this time, we do not anticipate additional historic tax transactions this year.
Turning to the balance sheet, the loan portfolio increased $483 million or 40% compared with last year's third quarter, including $271 million from FSP and 203 million from PPP.
Absent FSB and TPP lending, we experienced muted loan growth as a result of the current economic environment.
Our pipeline, however is solid and we expect to achieve moderate growth in the fourth quarter.
Total deposits were up 41% or 522 million since the end of last year's third quarter FSP added 239 million to this total we are.
Also experienced significant growth from our commercial customers as they accumulated liquidity due to the proceeds from PPP loan, while government stimulus payments and lower consumer spending drove an increase on the consumer deposit side.
In the quarter deposits were down slightly largely reflecting seasonally lower municipal deposit balances.
As a reminder, in the light of.
The heightened uncertainty surrounding COVID-19, pandemic, we completed a private placement of $20 million and 6% fixed to floating rate subordinated notes at the beginning of the third quarter.
That's all $15 million has been moved to the bank as tier one capital.
Looking forward, we will continue to adapt to changing market conditions and we are confident that we have taken the appropriate actions to remain in a very solid financial position to successfully operate during this challenging environment.
Concludes my comments, so we now would like to open the line for questions.
Thank you if you wish to ask a question at this time, Keith Siegner by pressing star one on your telephone keypad piece insurance function on your telephone switch to now you're sitting next to me Jerry quick.
Again, Please press star one to ask a question.
We'll pause for just a moment.
For Q.
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We'll take our first question from Alex Twerdahl, Hi from Sandler. Please go.
Yes.
Good afternoon guys.
Good afternoon Alex.
Just first off wanted to circle back to the hotel.
Downgrades during the quarter, you, obviously gave a lot of detail here.
Et cetera, but is there.
Do you have line of sight to some of these loans.
Stopping paying or or maybe you can give us a little bit of color on sort of what the debt service coverage ratio looks like or if there is like a real specific reason why theyre being downgraded or if it's just just overall.
[noise] stresses in the industry.
I think it's a combination of a couple of those things Alex are both of those things.
There for.
For a period of time, there in the second quarter there.
Debt to income ratios were you know infinitesimal just because there was no revenue coming in like a lot of industry.
I think really the move to the downgrade was the impact in the longevity that we see COVID-19 impacting through the third quarter and we've made that assessment bad it it's going to take a while especially some of the seasonality as these this industry have especially up in our footprint.
Such that they're not going to get back to a decent cash flow and told probably theres theres theres more opening from from COVID-19 next year as well as the impact from seasonal from the seasonality. So we're looking for they're.
<unk> revenue to come back next season, which would start in the spring and summer and that will give us a better indication of the health of their health.
We also thought it would be better to continue receiving some payments Alex in terms of the interest that were getting paid they may be paying interest only but they are paying some people are paying principal and interest, but it was more a reflection of what's going on in the industry.
Because we did not want to continue to defer if we didnt need to.
Understood how much of that provision and they are in the third quarter would be attributed to those downgrades specifically.
Almost almost all of it though.
Okay.
And then I guess it would be pretty fair to assume that if there was if you saw similar stresses in some of the other at risk industries like restaurants, or what not that you have done similar action. So.
Based on where you sit today, so I would tell walk into concerned everything else seems to be at least has line of sight back to normalcy.
At this point, yes, that's what we're seeing and most of our other industries and clients have gone back to.
To.
Not business as normal, but certainly a point where would they have some predictability.
I'd say one other thing Alex it with regard to the hotels to we have clear line of sight into those businesses were talking to them probably once a week.
This is a a or call it a life preserver for them to continue paying us, but but get to a situation where they can improve their occupancy and begin resuming full principal and interest payments.
We're having some good success in Rochester, but it's across the footprint and.
We also have a pretty.
Pretty robust.
Residential mortgage market going on right now too but.
It's generally our commercial business that we're talking about when we're talking about the pipeline here.
Okay, and then the residential its a lot there's a lot of that goal.
Secondary market or are you going to bring some of that in your balance sheet.
We're we're putting it on our balance sheet, just as I mentioned, we have a significant amount of cash and looking forward I think utilizing some of that based on our balance sheet as we're already.
Ending the dollars to originate it we're going to put some of that asset on but there is some robust refinancing or pay off out of our own current portfolio. So there. It. So there will be a little muted growth, but we expect to be growth on the residential portfolio as we take an opportunity to put some of those.
As assets on our books also there was also a bit of a commitment for sale from the FSB portfolios. So not all of its going to go on our books, but what we can put on we will and some will still go to the secondary market that were pre committed.
Okay, and then just I think into the fourth quarter on on fee income.
Usually you see a little bit of a tick down in insurance revenue, which is pretty consistent every single year, but then when I look at some of the other lines like deposit service charges. It looks like you're you're not back to a full run rate yet.
Compared to last year and of course with the additional operations deeper.
Do you foresee that getting back to a normalized level by the fourth quarter or do you think there is going to continue to be some stress on some of these categories just due to customer behavior.
I think there are I think third quarter is probably a good proxy for going forward, but I think.
I think customer behavior right now.
If cove it starts to.
Things up a little more we might it might pull back on that but.
Expectation is is this run rate is probably good for the for the foreseeable future and in the next few quarters.
Okay, and then and it's at the same for expenses.
In terms of the integration and everything like that that's done.
How should we be thinking about expenses from here.
Well I think again these expense the expense level that we had in third quarter is pretty emblematic of of our run rate and our base.
Yeah, absolutely Andrew or dividend.
Yes of course, and then just finally from me on the tax rate.
I know you said you weren't can do any more tax credits in the near term, but should that 11.8% and we saw the stated tax rate should that carry through from there into the final quarter of the year or are we going to get to that normalized two.
25, and a half inch level for the final quarter.
I know that the current rate should be should fall through to the fourth quarter, because we take the benefit in each quarter.
Even though we took the the actual we recognize the credit in the <unk> in the first quarter benefit run through the whole year, obviously next year.
And going forward not expecting to take a lot of tax credits that run rate tax tax rate should be more.
America, what we're doing going forward.
Great well, thanks for taking all my questions guys.
Thanks Al Thanks, Alex.
And as a reminder, please press star one to ask the question.
We can now take our next question from Kevin.
Please go ahead.
Hi, guys.
Hi, Kevin Kevin.
Hey, just starting off.
Sent to the municipalities or not it'll be a challenge, there's pretty big deficits out there. So there's some economic impacts that could also impact.
This thing so I am sorry to be a little bit of Tucson that Kevin, but there's still some uncertainty I think.
Not as helpful. It's it's.
That's quite a question to figure out what happens in the future I guess, maybe just piggyback enough that a little bit.
[noise] cause in the second round of of statements, if we get it or not get it does it does it change in expectations when Npa's might peak.
For us I would say well, yeah, I'd say, Kevin Iron license plate into our businesses I think at the level of activity and the economy up here and our.
In front of our clients.
Is sufficient enough excluding the hotels to maintain you know.
A good business atmosphere.
I think the hotels is where.
If a stimulus does come in can help them weather the storm through until COVID-19.
It's a vaccine or some other some other resolution comes through I think that is where we would look for some assistance to help that industry through to the to the point where consumers feel more comfortable to go back to normal to you know visiting those those those clients.
Okay, Great and then then maybe you know just.
He came back about the hotels.
Have you been any.
Market data or changes sales et cetera that you could.
Look to as far as updating ltvs, assuming the ones that you gave in the presentation or are at origination.
But they're they're has I think the question you're asking is has there been price discovery yet in terms. So yeah, if hotels, they're gonna move and the answer is in this market no. There's not been good price discovery yet.
There was one hotel, which was a a merry off here in town that is getting sold it closed.
It is right near the University of Buffalo.
It went up for sale at an amount that was less than the mortgage amount.
It's a national on her and.
The bids came in lower than even that amount and they pulled it off the market because they're not going to sell it at that level, but other than that there has not been good price discovery.
In terms of if these things started changing hands.
Okay. Thanks, that's helpful and then I I guess so.
So much access to liquidity and some of your balance sheet changing with the acquisition is there any change in and how you think about the interest rates sensitivity in the on the balance sheet.
Five eight is John Kevin I think no I think we're.
We will have another disclosure in our queue I think.
No margin going forward, if there were you know.
The environment, the interest rate environment space things constant where will probably be at this level, but up or down where we don't have a significant amount of interest rates sensitivity and as well down it's probably there's no down but in an upgrade scenario I think where we don't have a significant amount of rich.
If we could do start to pick up.
Okay. Thank you have I won't talk about bounce from here [laughter].
[laughter] and then maybe just two housekeeping questions that I can did you have Ah and the period P. P. P loans outstanding number.
200, we.
We made some or $203 million, okay at at the end of it.
Got it and then.
Basically that'll last quarter and I'm not sure we put it out this quarter, but that's the right number.
Okay, Great and then did you have a guest on what the allowance might be with the credit markets included and and without P. P. P.
Yeah.
Yeah credit Mark was small insignificant on the on the from the allowance perspective, Okay got it. Thank you very much I appreciate it.
Oh, Thanks, Kevin.
And as a fine airlines if you wish to ask a question can you check that one.
We have no further questions over the phone I said now I'd like to have to call back.
Sure I'll tell Ya.
Alright, well. Thank you very much Mary. Thank you all for joining us today and participated in a teleconference. We appreciate your continued interest and support please.
Please feel free to reach out to us at any time, and we look forward to seeing and speaking with all of it.
Certainly look forward to seeing all of you at some point here, but we look forward to speaking with all of you again and the new year. When we report our fourth quarter of 2020 results. We hope you have a great day and a great weekend. Thank you.
Okay cool. Thank you for your participation you may now disconnect.
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