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Edited Transcript of EVBN earnings conference call or presentation 24-Apr-19 8:45pm GMT

Q1 2019 Evans Bancorp Inc Earnings Call

HAMBURG Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Evans Bancorp Inc earnings conference call or presentation Wednesday, April 24, 2019 at 8:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Mychajluk

Kei Advisors LLC - SVP of Operations

* David John Nasca

Evans Bancorp, Inc. - CEO, President & Director

* John B. Connerton

Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer

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Conference Call Participants

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* Alexander Roberts Huxley Twerdahl

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Greetings and welcome to Evans Bancorp First Quarter 2019 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Craig Mychajluk, Investor Relations.

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Craig Mychajluk, Kei Advisors LLC - SVP of Operations [2]

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Thank you, Dana. Good afternoon, everyone. We certainly appreciate you taking the time to join us and your interest in Evans Bancorp. On the call today, we have David Nasca, President and CEO; and John Connerton, our Chief Financial Officer. David and John will review our results for the first quarter and then we'll open it up for questions.

You should have a copy of the financial results that were released today after the markets closed. And if not, you can access them in our website at 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. So with that, let me turn it over to David to begin.

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David John Nasca, Evans Bancorp, Inc. - CEO, President & Director [3]

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Thanks, Craig, and good afternoon, everyone. As you've seen today, we reported first quarter 2019 results with net income of $3.7 million, up 12% compared to last year's first quarter. The positive results compared to the same period a year ago were driven by higher net interest and fee income. On the whole, 2019 is off to a strong start with execution against our growth strategy is leading to notable performance across lending, deposits and fee-based businesses. This has been the result of efforts from our associates focusing on added value services to deliver new and deeper client relationships and grow market share.

John is going to run through all the numbers in a second, but I thought I would highlight a few brief items here. As I have discussed in previous calls, the company is focused on attracting experienced commercial loan and support personnel over the past several years. These associates have delivered an annualized 10% growth rate in commercial loans during the first quarter, on top of 14% compounded annual growth over the last 5 years.

Moving to deposits. We continue to benefit from our investment in government banking services. The growth in deposits during the quarter and over the prior year first quarter is in large part reflective of our efforts in winning new core government banking relationships, diversifying our sources in response to a challenging deposit environment experienced industry-wide. Last year, we grew deposits at a rate exceeding loan growth, allowing us to reduce our loan-to-deposit ratio over the previous year.

Performance in our fee businesses during the quarter was driven by last year's insurance agency acquisition of Richardson & Stout Agency, and the continued growth in employee benefits revenues. We believe both these lines of businesses -- both of these lines of business provide opportunities for deeper commercial relationships and can provide diversification of our revenue streams during volatile market conditions.

Looking forward, our commercial loan pipeline continues to be strong. And notwithstanding some mixed signals from economic indicators, we have seen little from clients that would indicate that there is inherent weakness in the local economy. Anecdotally, we have heard the largest difficulty is getting qualified employees to support the growth that these businesses are seeing currently.

Additionally, almost 65% of loan production in the quarter came from C&I loans, significantly eclipsing our traditionally robust commercial real estate production and reflective of our efforts to diversify loan classes.

As all are aware, interest rates are somewhat more challenging than we thought 3 months ago and there's likely to be further volatility. Given that, we expect our margin will continue to be reasonably stable over the remainder of the year as we attempt to manage deposit costs and mix by creating significant focus in obtaining our commercial client demand deposits and endeavoring not to chase hypercompetitive rates on time deposits.

Our capital position remains strong. This was reflective of the 13% increase in our dividend during the quarter as we continue to provide strong returns for our shareholders. We also recently filed a $50 million shelf registration to replace an expiring registration which was partially used in 2017. Although we currently have no uses or opportunities under consideration, the shelf provides continuation of a tool to efficiently execute if we were to identify appropriate initiatives or capital needs.

Overall, I'm very pleased with the quarter and I want to thank our employees for their continued hard work to both drive our business forward and help our communities thrive. We have seen one of our community investments in the United Way work-life solutions program already generate 28 small dollar loans and countless services to help employees persist in their employment as opposed to falling out due to fiscal and social strains.

And with that, I will turn it over to John for a closer look at our first quarter results, and then we will take your questions. John?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [4]

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Thank you, David, and good afternoon, everyone. As David stated, net income was $3.7 million or $0.75 per diluted share in the first quarter of 2019 compared with $3.3 million or $0.68 per diluted share in last year's first quarter. Net income was $4.5 million or $0.90 per diluted share in the trailing fourth quarter of 2018. The increase from last year's first quarter reflects higher net interest and fee income. The decrease from the linked quarter is due to lower loan provision and a net benefit from historic tax credit both realized in the fourth quarter.

Turning to the balance sheet. Loans grew $29 million, which equates to an annualized rate of 10% in the first quarter. Loan growth from the end of last year's first quarter was $75 million or 7% increase. Loan growth in the first quarter was predominantly in the commercial loan portfolio including $17 million in commercial real estate and $15 million in C&I loans. As David noted, we expect the strong growth trends to continue into 2019 given the strength of the commercial loan pipeline at the end of the first quarter. Total deposits of $1.3 billion grew $61 million in the quarter or 5% and were $141 million or 12% higher than the balance at the end of last year's first quarter. Municipal deposit growth of $45 million drove a total deposit growth in the first 3 months of 2019 due to seasonal inflows from tax receipts as well as the continuing acquisition of new customers.

The company also experienced solid growth in its commercial deposit portfolio, including $25 million in savings deposits. Consumer saving deposit growth has been challenging as preferences move toward term product with higher rates and local market competition has stiffened. Consumer savings deposit declined $8 million during the quarter, while consumer time deposits also declined $8 million during the first quarter.

The company's strong balance sheet growth drove an increase in net interest income of $1.1 million or 9% from the prior year first quarter and $0.1 million or 1% from the trailing fourth quarter. Net interest margin was 3.79% for the first quarter of 2019, up from 3.70% in the linked fourth quarter and 3.77% from the 2018 first quarter.

The improvement in loan yields partly benefited from the Fed's interest rate move in December as our variable rate loans tied to the company's prime rate will retire. This was offset by an increase in funding cost, reflecting a rise in both core deposit and wholesale borrowing rates. The company's deposit betas were stable during the first quarter. Our cumulative beta which is the beta on our total interest-bearing deposits since December 2015 was 26%, while it was 25% for this December 2018 compared to our long-term expectation of 46%.

The competition for funding remains robust. We are concentrating our deposit pricing on acquiring and defending core deposit relationships and will be accommodated when targeting retaining these core relationships. The interest rate environment, including the flat yield curve will continue to present challenges to our margin. We are focused on being disciplined in our loan pricing while maintaining strong levels of growth. While the margin did expand in the first quarter, we expect our margins to experience a moderate level of compression of between 3 and 5 basis points for the remainder of the year.

Turning to the asset quality. The $538,000 provision for loan loss for the first quarter of 2019 reflected provision needed to account for the quarter's loan growth. This is a decrease from $767,000 provision recorded in last year's first quarter that also reflect a strong loan growth and 1 large downgrade in the commercial loan portfolio in that quarter.

We continue to have confidence in our portfolio's overall credit quality as quarterly charge-offs remain low at 0.04%, our allowance-to-loan ratio was unchanged quarter-over-quarter at 1.28% and our nonperforming loan-to-total loan ratio increased from year-end by only 5 basis points to 1.69%.

As we have discussed in recent quarters, 60% of the nonperforming balance consist of 2 large commercial real estate loans. We continue to see progress on the eventual positive resolution of these credits.

Noninterest income for the quarter of $4.2 million was up over $400,000 from last year's first quarter and $1.2 million from the linked quarter. The fourth quarter of 2018 include the impact of a net reduction of noninterest income of $873,000 related to investments in historic rehabilitation tax credits. There were no historic tax credit investments in each of the first quarters of 2019 and 2018.

Insurance revenue of $2.4 million was up from $2 million in last year's first quarter and $2.2 million in the fourth quarter of 2018. The growth in insurance revenue was mostly a result of the acquisition of R&S in the second quarter of last year. As we discussed last year, the 12-month impact on revenue from R&S is projected to be approximately a $2.5 million increase. As is consistent with our historical insurance business, R&S will have some seasonality each quarter in the amount of revenue recorded.

Noninterest expenses of $11.2 million decreased from the trailing quarter by 2% or about $0.2 million, and increased 10% or $1.1 million from last year's first quarter. The first quarter of 2018 includes approximately $250,000 in salary costs related to the onetime $1,000 bonus paid to associates. Exclusive of these bonuses, the increase from last year's first quarter includes an increase of $0.5 million or 12% in salaries and benefits cost and $0.1 million or 17% in technology expenses.

Higher salary expenses reflect the R&S acquisition as well as an increase in the benefit cost. While the higher technology expenses was due to higher ATM card fees, online banking activity and software costs. Income tax expense for the quarter was $1.2 million, representing effective tax rate of 24.7% and 22.8% in last year's first quarter.

During the fourth quarter 2018, the company recognized an income tax benefit of $0.2 million. The benefit was driven by the impact of historic tax credit investment transactions in 2018. Excluding the impact of the historic tax credit transaction, the effective tax rate for the fourth quarter of 2018 was 23.1%.

That concludes my comments. So I now would like to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alex Twerdahl with Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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First, I just want to go back to the margin. Was there anything in the margin this quarter that could be considered kind of noncore or prepay, penalty fees or anything like that?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [3]

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No. It's strictly pretty clean in there as far as those items.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Okay. And then the 3 to 5 basis points of compression, that's over the course of the remainder of the year, correct? Not per quarter?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [5]

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That's correct. Over the remainder of the year.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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And is that primarily going to be driven by just that like a little bit of a tail on higher funding costs?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [7]

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I think we still have -- suggest that we're still seeing some pressure there and I think we'll see probably more movement on the cost of funds than we are, especially with the yield curve where it is, on our offering rates on our loans. So we'll see a little compression there.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [8]

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Will we see any more pick up in the -- or probably not as much, but any more pick up in the yield on loans just given what the yield curve looks like without any further rate hikes?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [9]

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We'll see some increase in the yield on loans. Just based on where our portfolio has been over the last couple of years, it now is trending higher even with the current offering rate. But I think we will see some compression in comparison to the yields that we're getting on the growth compared to the cost of funds that we're expecting.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [10]

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Okay. And then going over to fee revenues, was the insurance revenue, is that kind of in line with what you have expected if you layer on kind of the normal seasonality, et cetera, for the first quarter with the contribution from Richardson & Stout?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [11]

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Yes. So my comments were trying to explain that they have seasonality too, very similar to our business without them in there. So that $2.5 million is still what we -- based on what we got in the quarter, we're still expecting that per year, but again, due to the second and third quarters have higher revenue booked versus the fourth and first quarters.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [12]

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Okay. Can you break out contribution from Richardson & Stout was so we could sort of compare where insurance revenues were first quarter versus last quarter?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [13]

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On the revenue line, it's around $480,000 to $500,000.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [14]

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Okay. So 1Q '19 over 1Q '18, exclusive, it was relatively flat?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [15]

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Yes.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [16]

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Okay. And then can you just update us on kind of how you're thinking about the reserve, where it is today, and then where you are in the process of getting ready for CECL?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [17]

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We're continuing to have the same calculation and approach until the first -- until next year's first quarter. As far as where we sit, we don't really have a good understanding of where our numbers' coming in but we're moving along in our process. We've put together our calculation and the system that we're going to use and we're generating information on data but we're not prepared to discuss what the eventual impact. Probably later in the year we'll have a better understanding of that.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [18]

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And then just final question for me, tax rate for the remainder of the year?

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John B. Connerton, Evans Bancorp, Inc. - Principal Financial Officer, Principal Accounting Officer & Treasurer [19]

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Again, as we've in the past, we do have some in the pipeline. The tax credits, Alex, so that will impact it. But excluding any of those, I think the 23% to 24% is typically where we see our tax rate coming in at.

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David John Nasca, Evans Bancorp, Inc. - CEO, President & Director [20]

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And the tax credits, Alex, are becoming a little bit of a thing of the past with some of the tax law changes. We have a few in the pipeline but that's not going to -- it's not as frequent or as robust as they were pre-tax law changes.

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Operator [21]

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(Operator Instructions) There are no further questions at this time, and I would like to turn the call back to management for closing remarks.

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David John Nasca, Evans Bancorp, Inc. - CEO, President & Director [22]

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All right. Thank you again for joining us today on the teleconference. I hope you can join us in July when we report our second quarter 2019 results, and we hope everybody is getting a little dose of spring out there, and we wish you all a wonderful day. Thanks again.

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Operator [23]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.