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spk04: Greetings and welcome to Evans Bancorp fourth quarter and full year 2020 financial results conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host and investor relations for Evans Bancorp, Deborah Kulowski.
spk01: Thank you, Omar, and good afternoon, everyone. We certainly appreciate your taking the time today to join us and your interest in Evans Bank Corp. On the call, we have David Nazca, our President and Chief Executive Officer, and John Connerton, our Chief Financial Officer. David and John will review the results of the fourth quarter and full year 2020, and then we will open up the call for questions. You should have a copy of the financial results that were released today after the markets closed. 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 a formal presentation 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 calls. These risks and uncertainties and other factors are provided in the earnings relief as well as with other documents filed by the company with securities and exchange commissions. You can find those documents as well on our website or at sec.gov. So with that, let me turn it over to David to begin. David?
spk03: Thank you, Debbie. Good afternoon, everyone. We appreciate you joining us for the call today. This goes without saying, 2020 was a singular year unlike any other. with monumental upheaval that tested the fortitude and resiliency of our organization. I'm most proud of what our entire Evans team achieved. We responded rapidly to support the people and businesses in our region to help them navigate the many challenges presented by the pandemic. At the outset of this disruption, we quickly adjusted to a new remote work posture to protect our associates, clients, and the community. In fact, by the end of last March, we had over 96% of our non-branch staff working remotely. While we have had some reintroduction to the office environment, we are predominantly operating in a remote stance and will through at least this spring. Given the multiple changes to guidelines for operating safely, the retail delivery channel has also seen significant impact, alternating between branches being drive-through, mobile, and ATM only, to being open with appointments only, to being fully open with safety protocols and equipment. To facilitate business and continue to serve clients, a number of new processes and technologies were employed throughout the bank, as well as new customer-facing tools such as online document signing, end-to-end commercial lending platform tools, secure communication platforms, and paycheck protection program bulk application submission software, to name a few. From an industry perspective, intense pressure was put on net interest margins as the Fed lowered rates to near 0% to address business challenges and shutdowns occurring as a result of the pandemic. Liquidity flooded the system due to PPP, and there were few opportunities to redeploy profitably. In addition, industry-wide income was negatively impacted in a material way by the holding of significant reserves in response to macroeconomic trends, and concerns including unemployment, reduced spending, and business slowing to levels never before seen. During the year, while COVID significantly impacted the financial industry and operations, we were able to pursue execution of our strategy through the flexible and committed efforts of our team to position the company for long-term growth. This included a number of significant achievements. We extended and bolstered our market presence in the Rochester market by successfully closing and integrating the acquisition of $322 million asset Fairport Savings Bank. The acquisition helped scale our mortgage operation by quadrupling production volumes and strengthening operating platforms during one of the hottest markets for home financing in history. The integration of employee benefits brokers of Western New York occurred very early in the year. after closing on December 31, 2019. This will provide complimentary fee income and business to our insurance agency. During the year, we closed 1,933 PPP loans totaling $203 million, which were originated and closed during this year. Evans was the only bank in our market that accepted applications from all clients and non-clients without a pause. This resulted in the bank transacting with approximately 900 new-to-bank prospects, effectively doubling the size of the commercial borrowing portfolio in approximately 45 days. Supported needed debt was opportunistically raised mid-year as a lower cost source to add capital after the FSB acquisition and provide additional strength against business uncertainties. Additionally, construction was completed on our new administrative headquarters in Technology enhancements were incorporated. The move was accomplished combining occupants of three facilities into one, and our former administrative facility was sold at a gain. Equally important were our actions in support of our core values. Payment deferrals were provided to commercial and consumer borrowing clients to assist their cash flow and address possible rent or mortgage holidays. We suspended fee income for services and served as a conduit to government stimulus as originators of SBA guaranteed PPP loans while trying to address ever-changing governmental regulation. Several community grants were given, including to two Buffalo area charter schools that Evans supports. These funds assisted in changes needed to respond to COVID-19, including the addition of a part-time school nurse and virtual curriculum support. Additional donations were made to charities fighting food insecurity exacerbated by the pandemic and economic fallout in our communities. A new financial fitness initiative was launched and partnerships established to enhance financial proficiency in the communities we serve. A new bank branch office in Westminster Commons, a low-income senior housing project financed by the bank, located in an underserved market within our footprint, was approved and is expected to open in the first half of 2021. And amidst political division and racial unrest, we refocused and enhanced our diversity, equity, and inclusion efforts. A national consultant was brought in to facilitate discussions with associates and the board of directors on concerns related to racial inequity and unrest in our communities, as well as help solidify Evan's position as a community participant in the dialogue around these issues. A review and needs assessment were completed along with insights and recommendations for a path forward that our DEI steering committee is leading. To wrap up, 2020 was an incredibly challenging year, but it also showcased the bank's agility and resilience. Tremendous credit goes to all our associates in management who soldiered through and showed outstanding grit in an impossibly difficult and chaotic environment. As we look to the new year, We are optimistic that the pockets of recovery within our markets will continue to strengthen and the building developments with vaccinations can return the country to a more normal state. Even as our world continues to operate in a drastically changed environment, we are positioned to assist and take advantage of the opportunities ahead. With that, I'll hand it over to John to run through our results, and then we'll be happy to take any questions. John?
spk02: Thank you, David, and good afternoon, everyone. Net income was $6 million or $1.11 per diluted share in the fourth quarter compared with $3.7 million or $0.75 per diluted share in last year's period. The increase reflected higher net interest income largely due to the FSB acquisition and fees earned in connection with PPP lending. Net income also increased over the trailing third quarter as the period had an elevated loan loss provision to reserve for well-defined weakness in the hotel portfolio and contained remaining merger-related costs. Net interest income increased 789,000 or 5% from the third quarter of 2020 and 3.6 million or 28% from the prior year fourth quarter. The increase from the sequential third quarter resulted from acceleration of the amortization of PPP loan fees as we recognized the first PPP loans to be forgiven by the federal government. This acceleration resulted in approximately $400,000 of additional income during the quarter. We did release $126,000 of allowance in the quarter, largely as a response to current positive macroeconomic trends, such as unemployment. Net interest margin improved to 3.38% in the fourth quarter, up 19 basis points over the linked period, largely due to the accelerated PPP fee amortization and reduced interest expense as we continue to reduce rates on certain deposits. The 29 basis points declined from last year's fourth quarter reflects the Federal Reserve's decrease of the federal funds rate by 150 basis points early in 2020, and changes in the mix of interest-earning assets, including greater interest-earning cash balances, PPP loans, and residential mortgages from FSB. We have a strong commercial pipeline in the first quarter of 2021, and additionally, as of today, have received 544 second round PPP applications amounting to approximately $64 million. Both these sources of origination should result in continued expansion of our margin between five and eight basis points over the next couple quarters as excess cash is deployed into higher interest earning assets. However, there may be some variability as the margin will be dependent on the speed of forgiveness for the first round of PPP loans, which can accelerate or slow the amortization of the related fees. We expect 90% of the remaining $4.6 million in deferred PPP fees to be amortized this year as forgiveness is recognized. Non-interest income for the quarter of $4.8 million increased about $800,000 from last year's period, largely driven by the gain on sale of our former administrative headquarters. which was approximately $600,000, and can be found in the other income line. Non-interest income was down $1.1 million from the linked quarter, largely due to the seasonality within our insurance business. The addition of FSB impacted a number of non-interest expense line items this quarter, including higher salaries and benefits, advertising and technology costs. Of note, we had no merger-related expenses in the fourth quarter of 2020. FDIC insurance expense increased as a result of growth in assets and the reduction in the prior year's expenses due to the application of the FDIC small bank assessment credit, which was not applicable in 2020. The company also made adjustments for incentive accruals to recognize contributions of associates during the challenging environment in 2020. The effective tax rate for the quarter was 12%, which reflects the historic tax credit transaction completed in the first quarter of 2020. Absent the tax credit, the rate was 22.1%. At this time, we do not anticipate additional historic tax credit transactions after this year. Turning to the balance sheet, the loan portfolio increased 467 million, or 38%, compared with last year's fourth quarter, which reflects 271 million from FSB and 203 million from PPP. Compared with the late 2019 third quarter, loans declined slightly, mostly due to PPP loan forgiveness. We continue to have confidence in the overall credit quality of our portfolio as quarterly charge-offs were one basis point, and our allowance-to-loan ratio was 1.21%. We did see non-performing loans tick up, which was centered on two hotel credits, As we discussed last quarter, our focus has been on the hotel portfolio, which was all moved to criticized status. While the majority continue to pay either interest-only or full principal interest, as part of our ongoing reviews, we did identify these two credits as having longer-term issues beyond typical seasonality. Since moving the hotel portfolio into criticized assets during the third quarter, new appraisals have been completed for a majority of those loans. Recent market valuations have declined in the current economic environment. However, the hotel portfolio continues to be well-collateralized with an average loan-to-value of 67%, and we believe that we are appropriately reserved. Total deposits of $1.8 billion grew 40% or $504 million since the end of last year. The increase was driven by FSB, which added $239 million of deposits and heightened liquidity levels of commercial customers, including deposits related to PPP loans, increases in consumer deposits from government stimulus payments, as well, slower consumer spending. Seasonally, lower municipal deposits account for the slight deposit decline since the linked third quarter. Looking ahead, we believe that we are well capitalized and have financial flexibility to weather any potential near-term headwinds while being in a strong position to fund future balance sheet growth. That concludes my comments, so we now will open the line for questions.
spk04: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from Alex Twerthall with Piper Sandler. Please state your question. Hey, good afternoon, guys.
spk03: Good afternoon, Alex.
spk06: Hello, Alex. First off, just wanted to talk about expenses for a minute. I know there's some stuff from the FSB acquisition and you cited some higher incentive compensation in the expense line for the fourth quarter, but You know, maybe just help us get a sense for how much of the fourth quarter might have been inflated by some of the higher incentive comp and sort of what the right starting point is for 2021 would be very helpful. Thanks.
spk02: Sure. I think, you know, the big impact on the expense line is in the salaries. And comparing the $9 million or so for the fourth quarter versus the linked quarter of $8 million, It's really – the impact there is the third quarter was depressed from the – because we took a benefit in third quarter by adjusting down the incentive. And then in the fourth quarter, we actually had a more typical incentive period because what we did in the third quarter is as we went through the year, it was evident that we weren't going to make our bonus as it was calculated. But then in the fourth quarter, management working with the board determined that with the efforts that were made, we would adjust back up. So there was a time frame. the run rate of the fourth quarter is more of the appropriate run rate of around $9 million.
spk06: Understood. Is there anything else either in the fourth quarter that might not be super obvious in expenses that wouldn't recur into 2021? And then also just in terms of cost saves and things like that, synergies from the transaction, are they all at this point recognized and reflected in the expense run rate?
spk02: Yeah, I think the remaining, I mean, I think the run rate in the fourth quarter is pretty indicative of our operating run rate that's going to be going forward. I mean, there'll be obviously in first quarter we'll have some increases due to merit increases that we typically have every year. But I think the expenses and the cost saves that we have are baked.
spk06: Understood. Thank you. And then in terms of the PPP, just for, you know, my notes here, the amount that was actually forgiven in the fourth quarter, I'm not sure I saw that in the press release. Can you just tell us what that was?
spk02: Sure. It was $17 million was forgiven in the fourth quarter.
spk06: Okay. And then maybe you can talk, David, a little bit about the loan pipelines. I know you mentioned that the commercial pipelines were strong going into the first quarter of the year. Do you expect that to translate to net commercial and loan growth in the first couple quarters of ex-PPP? Or are you seeing the PPP cannibalize some of the loan growth that you normally would have put on earlier in the year?
spk03: Let me say it this way. I'm optimistic that the pipeline is indicative of better growth going forward. I don't think the PPP will cannibalize that growth. when I was talking to the lending guys, you know, one of the girls, one of the things they said was, you know, last year, when PPP started, that was all that was going on. This year, we got our regular day job going on as well. So I don't think that there's cannibalization that's going to happen or shut down there. I think there's people that have held off as long as they can, and there's a need to do their business here going forward.
spk02: So Alex, just to add to that, I think our Our pipeline rate would be indicative of growth, as David said, obviously caveating that if roll-off and refis continue on from last year, that it might be somewhat muting the growth that we would see based on the pipeline originations that we have in-house. But we think just the originations themselves would be indicative of historical growth.
spk06: Great. And then just final question for me on the margin, if you could just – the five to eight basis points that you cited of expansion in the next couple quarters, is that kind of the all-in margin inclusive of all the PPP forgiveness, accelerated forgiveness fees and things like that? And then, you know, if you kind of take the PPP acceleration away – You know, how do you think the margin in NII is set up over the next couple quarters, you know, just given sort of what you're seeing on new loan rates and, you know, opportunities, you know, to still lower cost of deposits and liabilities, et cetera?
spk02: I think probably half of that is – that is – that acceleration is baked into my estimate of where we think we're going to be going. I'd say half of it is – half of that benefit is – or more than half is due to the accelerated fees. But otherwise, I would say is our core net interest margin excluding PPP fees is stabilized to slightly up.
spk06: Great. Thanks for taking my questions.
spk02: All right, Alex.
spk04: As a reminder, if you'd like to ask a question, press star 1 on your telephone keypad. And our next question comes from Bryce Rowe with Hovdeet.
spk05: Thank you. Good afternoon. It's good to talk to you. Hi. Just wanted to maybe talk a little bit more about the PPP and certainly appreciate some of the commentary you gave around that. So you said that you expect the forgiveness of, I guess, round one, 90% to occur this year, can you give us a sense for kind of what you've seen here so far in 2021 in terms of that pace? And is there a, you know, is there some chance that potentially the pace of forgiveness may be a bit faster than what you forecasted here?
spk03: Bryce, I'm going to start with this. This is Dave, NASCA. and then I'm going to let John get more technical. I don't want to be too wonky, but we amortized those fees in the income over the expected life of the loans. So there was an expectation of those coming back at a fairly level rate, and those are in there. What we've seen in the first quarter, well, the first quarter, we're in February 4th here, but what we've seen thus far is a little bit of a hold on acceleration right now as people are coming in for their second round of PPP, for example. So our attention to folks or the their attention to getting forgiven right now, when they have time to do that has maybe been diminished as they focused on getting their second draw to say so that's the high end wonkiness of it. I'll let If you wanted more detail, John can provide a little more on that.
spk02: Yeah, I'd say the only thing I would add to that is, to David's point, I think there's been a little bit of a halt on our customers' request for forgiveness just because they're focused on their second round. A lot of them are focused on their second round of PPP. And so we would expect that probably in the latter part of the first quarter and then second quarter and then certainly third quarter would probably be the time where that 90% is fully done.
spk05: Okay. Okay. That's helpful. And so in terms of this second round, you highlighted the number of apps that you've taken. Any sense for relative to the first round how much you might deploy? Here, I think we've heard from other banks throughout earnings season that the range is somewhere between, I don't know, 35% and 60% of the first round balances. Does that feel about right for you all?
spk03: Well, I'll give you a couple of statistics. And then 50% is sort of in the average there. And that's probably where we feel it is. If you look at it, we did 1,933 loans. last year and we did $203 million. Thus far, we've accepted 500 applications and $64 million. We think that that'll continue going, but we, you know, the number that we targeted probably half of the first round, so that would be, you know, 900, 1000 applications maybe, and maybe, I don't know what the dollar amount is. It depends, but That 50% is probably a good thumbnail sketch of where we think we'll be.
spk05: Okay. Okay. That's helpful. I wanted to shift to the deposit funding side of things now. Just maybe to follow up on Alex's question, you've seen – just wondering if there's some opportunities to continue to remix the deposit – the deposit portfolio, you know, away from, you know, CDs or time deposits. You just kind of wanted to get a feel for if there's any level of, you know, wholesale broker type funding in that deposit portfolio. And if so, you know, what that level is. And then in terms of kind of the rates, where are the rates today, you know, within the transactional type deposits as well as, You know, there's time deposits.
spk02: So I guess I'll kind of take it in a couple pieces. First, on our CD portfolio, we have a de minimis amount of brokered CDs. But we do have, you know, when we project out and we look at our CD portfolio, we do still see some ability to continue to price down that portfolio. And what we've been experiencing is probably a 60% retention rate at a much lower rate, obviously, is somewhere between five basis points and 15 basis points that it's coming on at. And then what's happening with those funds is most of it's not leaving our bank but going into more liquid transactional accounts, savings and now accounts, which are, again, down into the single digits that the rates are – rates that we're offering on those products at this point. Okay.
spk05: Then it goes along with what the margin quote-unquote guidance was in terms of maybe seeing some stability here if you're able to reduce those funding costs. That's good.
spk02: Yeah, I think the other side of that obviously I'm sorry, Bryce. The other side is our assets obviously are continuing to reprice down, so we're hoping that You know, our expectation is those two will offset each other, benefit on one side on the cost of funds, and unfortunately, you know, the rates are hitting us on the yields from the loan perspective.
spk05: Yep, yep, I totally get it. And then in terms of criticized loans, it looks like, you know, the increase was primarily just tied to the two hotel loans that you cited in the press release and in your comments.
spk02: Yeah, exactly. You know, we've been watching that portfolio. You know, it's really about the individual credits and the operators, and we think, you know, these operators probably had issues that going into the pandemic are probably more evident now, and we feel that those are the two out of our portfolio that have shown probably a longer-term systemic problem, and we've decided to put them into non-performance.
spk05: Okay. And is there a specific reserve against those two credits at this point?
spk02: No. You know, as I commented, we have good loan-to-values on those, and they're recently appraised, so they're current, what I would say, currently in the current market appraised, so those even at that level, which is certainly different than let's say 12 months ago, we still have good value in that collateral, and we don't have any specific reserves.
spk03: And I'd suggest one of those loans has agency guarantees on it as well, which supports the credit, and there's significant agency guarantees.
spk05: Okay. Okay. Thank you all for the comments and questions, and I'll step back out.
spk03: Nice to talk to you, Bryce. Thank you.
spk04: Ladies and gentlemen, we've reached the end of the question and answer session, and I'd now like to turn the call back over to President and CEO David Naska for closing remarks.
spk03: All right. Thanks, Omar. Thank you all for participating in our teleconference today. We're certainly appreciative of your continued interest and support. Please feel free to reach out to us at any time, and we look forward to talking with all of you again when we report our first quarter 2021 results. We hope you have a great day, and thanks again.
spk04: Thank you. This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.
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