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Evans Bancorp: Credit Costs To Undermine Acquisition Benefits

Jun. 13, 2020 9:54 AM ETEvans Bancorp, Inc. (EVBN)2 Comments
Sheen Bay Research profile picture
Sheen Bay Research


  • EVBN has material exposure to COVID-19 sensitive industries, which will likely drive provision expense in the year ahead.
  • The net interest margin will likely contract in the second quarter following the federal funds rate cuts of March.
  • The acquisition of FSB Bancorp will increase earning assets, which will, in turn, support earnings for the year.
  • Risks and uncertainties will most probably negate the attractive valuation in the near-term.

Earnings of Evans Bancorp (NYSE:EVBN) plunged to $0.04 per share in the first quarter from $0.75 per share in the last quarter of 2019. Earnings will likely improve from the first quarter but remain below 2019's earnings in the remainder of this year. The provision expense will likely remain above normal in the year ahead on the back of the company's exposure to COVID-19 sensitive industries. Further, net interest margin contraction following the interest rate cuts in March will pressurize earnings in the remaining three quarters. Moreover, EVBN will likely book high one-time merger-related expenses in the second quarter. On the other hand, loan growth through the acquisition of FSB Bancorp and the Paycheck Protection Program will likely support the bottom line. Overall, I'm expecting earnings per share to decline by 55% year-over-year in 2020 to $1.53. After adjusting for the one-time merger costs, I'm expecting EVBN to book earnings of $2.43 per share. The probability of an earnings miss is unusually high this year because the impact of the COVID-19 pandemic on future provision expense is uncertain, and consequently, difficult to predict. The December 2020 target price suggests a high upside from the current market price, but due to the uncertainties, I'm adopting a neutral rating on EVBN.

Exposure to High-Impact Industries to Drive Credit Costs

EVBN's provision expense surged to $3 million in the first quarter of 2020, from $0.5 million in the first quarter of 2019. I'm expecting provision expense to decline from the first quarter in the remainder of the year, but remain above-normal. EVBN has material exposure to industries that have been hit hard by the COVID-19 pandemic, which will likely drive credit costs in the remainder of the year. Details given in the June 2020 investor presentation suggest that risky industries make up around

This article was written by

Sheen Bay Research profile picture
Around 10 years of experience covering Banks and Macroeconomics. Passionate about discovering lucrative investments and generating alpha.

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