Evans Bancorp, Inc. (NYSE:EVBN) Q1 2020 Earnings Conference Call April 29, 2020 4:45 PM ET
Deborah Pawlowski - Investor Relations
David Nasca - President and Chief Executive Officer
John Connerton - Chief Financial Officer
Conference Call Participants
Joe Fenech - Hovde Group
Greetings, and welcome to the Evans Bancorp First Quarter Fiscal Year 2020 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Deborah Pawlowski, 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 the today, we have David Nasca, President and Chief Executive Officer; and John Connerton, Chief Financial Officer. David and John will discuss actions we have taken to address the COVID-19 pandemic, review our results for the first quarter of 2020 and update you on our current situation. Then we will open the call for questions.
You should have a copy of the financial results that were released today after markets closed. And if not, you can access them on our website at www.evansbank.com. As you are aware, we may make some forward-looking statements during the formal discussion, as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ from what is stated on today’s call. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the Company with the Securities and Exchange Commission. You can find those documents on our website or at sec.gov.
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, for Evans, this year also marks a century of serving Western New York. As we address the unprecedented conditions that the COVID-19 pandemic has caused, two primary goals have guided us.
One, maintain the safety of our associates and clients, and two, do our utmost to assist our communities in responding to the hurdles presented by this emergency. Years of contingency, preparation and planning and the Herculean and selfless efforts of our team 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 1,500 clients and prospective clients. Operationally, this has been accomplished with 96% of our non-branch personnel working remotely and the remaining 4% or approximately ten associates working under safe conditions that do not involve client-facing responsibilities.
At the customer-facing branch operations, 15 of 16 branches are open and addressing customer needs fully. Drive-up 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, where direct customer activity had diminished to near zero as 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, telebanking and the customer contact center.
Customer interaction on these platforms increased on a magnitude of 30% to 70%. The utilization of other technology, including electronic signature software, and an end-to-end commercial lending platform has allowed us to continue opening new accounts including mortgage, deposit, and home equity and allowed us to effectively service the Paycheck Protection Program rollout 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 efficiently service clients digitally. This has been critical, given the New York mandate for businesses to implement work from home policies since March 22.
We believe operational consistency for our customers validated the investments we have made to build out capacity and is a testament to the strength of our information technology plan and IT staff. While this operating environment is certainly atypical of our relationship-oriented personal approach, we believe existing operations are resilient and can sustainably perform in this environment.
Additionally, there are views that the acceptance by customers of these technologies has been advanced significantly. At this time, stay at home orders are expected to continue through May 15 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 been proactive communication with our clients. As the situation evolved and became more severe in the latter half of March, our relationship managers began reaching out to our commercial clients. Within a week, we have touched base with every commercial relationship.
This was before any of the Federal assistance programs were finalized or the full restrictions were imposed by the state. We created a communication line 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 are proud to have interacted with over 1,500 borrowing clients and prospective clients and estimate we performed more than 3,000 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.
We 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 and categories of these requests during his remarks.
We were also proactive 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 PPP loan requests in Phase 1 of the program, which amounted to approximately $140 million or 77% of the requests we received before the funding was exhausted.
This level of activity equates to two plus years of growth completed in just 13 days. The average loan size was approximately $220,000 and we estimate that more than 17,000 jobs should be retained. A new round of stimulus funding was recently announced for the second phase of the PPP and we have an internal queue to assist with the remaining and new requests.
In total, as of today, there are 580 PPP loans guaranteed in our pipeline representing approximately $40 million. When totaled up for two phases, that’s almost 1,200 applications and guarantees received and over a $176 million in loans provided.
While dealing with this incredibly demanding environment and the associated challenges, we continue to successfully move forward with the work required to consummate our acquisition of Fairport Savings Bank. We received regulatory and FSB shareholder approval and look forward to close date in just a few days on May 1st, which is Friday.
We are 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 a 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 to. 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 while we hope – which we hope will be offset by the positive impact generated by Federal stimulus programs.
The increase in non-interest expense for the quarter primarily reflects a 9% increase in salaries and benefits as a result of the investments we are making in personnel to address our strategic growth plans, seasonally higher benefits expenses and increased merger-related expenses.
Total assets increased 4% since the end of 2019, as a result of solid loan growth in the quarter. Additionally, deposits grew 5% in the quarter against 2019's year end. Where we are today is of more importance to you and to our future.
While our loan portfolio represents greater risk than it did just eight weeks ago, we are actively engaged in federally funded programs that will support our borrowers and balance sheet. I’ll let John cover more of the details on this. I am normally thankful of the efforts of our associates each quarter, as it is their resolve that drives our success.
However, this quarter it is hard to express with words, of the appreciation for their dedication during this time. Commitment, strength, caring and bravery are a few words that can best describe the efforts I have witnessed. Each and every associated continues to inspire me daily.
With that, I will hand it over to John to run through the results in more detail and then we’ll 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 $0.04 per diluted share compared with $3.7 million or $0.75 per diluted share in last year's period and the linked quarter.
Net interest income increased 2% year-over-year, reflecting growth in our commercial loan portfolio. However, that growth has been muted by declining loan yields as a result of the repricing of the variable l rate loans tied to our prime rate as the Fed funds rate was significantly lower to 0% in the first quarter.
The net interest margin was 3.65%, down 3 - and 15 basis points -- and down 15 basis points from the linked 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 loss to 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 has a duration of under one year. Therefore, we expect the margin to stabilize at current at current level.
But keep in mind, there could be some unforeseen moves by the Fed and the impacts from the PPE portfolio is not yet known given the potential amounts that may not be forgiven by the Federal Government.
The $3 million provision in the quarter includes a $2.2 million reserve build in response to economic trends 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 industry makeup. Non-interest income for the quarter was negatively impacted $0.6 million due to the timing of an investment in a historic rehabilitation tax credit.
The other main variance year-over-year was within an other income line, which saw a reduction in the fair value of mortgage and servicing rights and lower transaction-based interchange fee income.
Non-interest 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 FSB acquisition.
We are expecting to incur the majority of the additional merger-related cost in the second quarter. Effective tax for the quarter was 17.7% 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 and 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 PPE and deferrals as well, as the changed operating environment for prospective borrowers, our commercial loan pipeline, while healthy, is not as robust as it has been during 2019.
From a credit risk and lending perspective, we have been proactive in working with clients and taking actions to identify and assess COVID-10-related credit exposures based on asset class and borrower type.
As part of that, our allowance to loan ratio did increased 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 hotels, construction, retail, accommodation, food services 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 borrowers who indicated they maybe experience financial hardship due to COVID-19-related challenges.
Through April 28th, 2020, we granted payment deferrals for up to three months of – 216 for consumer borrowers at $15.9 million, and 186 business buyers, 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.
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 quarter and were up $52 million or 4% from the end of last year’s first quarter. We have seen growth in all major product lines with the exception of time deposits. Total average demand deposits were $282 million for 2021 first quarter, an increase of 16% year-over-year.
At quarter end, the Bank had $52 million in available cash, total borrowing capacity with the Federal Home Loan Bank was $201 million and if needed, the investment security portfolio has $67 million available for pledging.
In total, these sources of immediate liquidity exceeded $300 million. In addition, the Ban is operationally prepared to utilize Federal Reserve borrowings collateralized SBA guaranteed PPP loans put forth to support funding of PPP closings and immunize Bank capital positions.
Operationally, we will continue to adapt the changing market conditions. We will remain focused on assuring the response to deposit needs assisting borrowers that experience financial hardship with payment relief, closing and funding of PPP loans and maintaining service standards in our financial services business.
That concludes my comments. So we will now would like to open the line for questions.
[Operator Instructions] Our first question comes from the line of Joe Fenech of Hovde Group. Please proceed with your question.
Good afternoon guys.
Hi, David, you guys already carried a higher than average allowance. So just with this boost now to almost 1.5%, would you consider this to be a sort of “not at all” type of provision? Or do you participate more to come as more information emerges? Just kind of looking for the specifics of what you base the reserve build on – in this particular quarter – in the first quarter?
I'll answer it, and then I'll ask for John to chime in. But I don’t think we are exactly sure what to expect for the next couple quarters, it depends on the duration of the events. It depends on how the borrowers come out of the event. We think with what we know now, we have the appropriate level of reserve. Can I guarantee that we won’t have more reserve going forward, I can’t.
John went through the numbers on the deferrals and we talked to you about how many PPP loans we have. It’s pretty significant that the damage that we see out there. And again, I've been telling everybody it depends on the duration of the event.
But the build right now, as John mentioned, $2 million of that was related to economic conditions that we see, unemployment, some qualitative factors that we look at economic strength or like thereof. So, that’s kind of my answer. I don’t know, John do you?
Yes, Joe, I think David mentioned it. I mean, they are big pushers, we have a qualitative component to our model and part of that is the unemployment. And that metric just pushed us to the point where we – what’s inherent in our portfolio based on those outside metrics is reflective in that – about $2.2 million of additional reserve specifically for the event.
Okay. That's helpful. And then -- yes, go ahead, David, sorry.
Another thing I would say, 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. I mean, we keep looking at this and not sure as to, again if the duration is longer and businesses get hurt because it’s close longer. Certainly, New York has had worst experience than many other states.
So, their reopening might take more of a delay. So, that would impact those kinds of results.
Okay. That's fair enough. And then, for the FSB transaction, any changes that you are thinking about or that we should be aware of relative to the projections you offered when the deal was announced, obviously the world has changed. And then, secondly, has FSB been active with the PPP program and any statistics that you have on what they’ve funded to-date?
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 the deposit projections that we have. We think it will be a little different in how we go at the market, because we are socially distanced. 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, tremendous growth in their pipeline and our pipeline. So, those projections actually may exceed what we planned in terms of the assets side. And in terms of the PPP account, they had limited commercial exposure.
They took care of their clients, because they weren’t a big SBA lender going into this. I think they did 19 or 20 clients, which is fair amount of their commercial book and they really didn’t reach further than that because they were really handle on 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. John, could you help us out with kind of the – I know it looks like that the deal at FSB is going to close, kind of around the midpoint of the quarter, little bit before. But, can you help us out in terms of, kind of runrate expenses, any type of help on kind of where you settled on tangible book value per share in terms of the impacts, if there is any changes there?
And then, I guess the margin outlook for the combined company? I know a lot of questions there, but just with the margin especially, given all the moving parts with interest rates and then with the deal, any help there would be helpful.
So, I mean, our original cost phase, as well expectations haven’t changed at this point, Joe. Our tangible book hasn’t changed and as far as the margins, again, to David’s point, they have a – the biggest part of their book is a residential portfolio.
Now there has – obviously, there is some prepayments fees going on in there, but they also have large CD books, that we feel as a pretty low duration as ours does.
So, I think between the two, we are looking forward, we think our outlook in net interest margin is going to be lower just in general, because they have a lower margin if you apply it to ours, as we had talked about during the acquisitions timeframe. But we don’t see it really impacting our projected margin that we had originally.
Okay. No. Very helpful. And then, last one for me guys. On PPP, kind of industry generalization have been kind of using for modeling purposes. It’s about a 3% net yield on the overall balance of funded PPP loans.
And then, assume 70% to 75% of the balance is forgiven, which means if it gets pulled into income this year. Is that kind of a fair way of – not asking it for prediction on how it turns out for you guys specifically, but do you think that’s a fair and reasonable way to look at it in terms of modeling?
I think – I Think the 3% is a fair number. I don’t – I can’t put a handle on the 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 PPP, the Cares Act. And how that gets recognized, whether that comes out of the 3%, there is some argument right now. The forgiveness part is not fully defined yet. But 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 haircut because of it – the agenting fee of accounts that helped put application fee or whatever. So, that’s the only caveat there.
Okay. Fair enough. Thank you guys.
[Operator Instructions] There are no further questions at this time. I will now turn the call back over to management for any closing remarks.
All right. Thank you, Darryl. This is Dave Nasca again. Looking forward, there is many unknowns to count. But I feel confident in our 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 a wonderful day. Keep your families and yourself 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 and have a great evening.