Press Release: Evans Bancorp Reports Net Income -2-
The decrease in insurance service and fee revenue from the third quarter of 2020 reflects typical seasonally lower commercial lines insurance commissions.
The third quarter of 2020 included approximately $0.7 million of gain on sale of investment securities, while there were no comparable gains in the current quarter of 2020 and fourth quarter of 2019.
The increase in other income was largely due to a gain of $0.7 million recognized on the sale of the Company's former administrative headquarters in the fourth quarter 2020.
Salaries and benefits costs increased from the third quarter of 2020 due to adjustments for incentive accruals, as the Company adjusted calculated incentives to recognize the contributions of associates during this historically challenged year. The increase from the prior-year period was largely due to the addition of personnel related to the FSB acquisition.
Advertising expenses decreased as the Company had increased spending in the previous quarters to highlight new promotional campaigns, particularly those in the Company's expanded Rochester market.
The increase in technology and communications from the prior-year period was due to higher online banking activity, ATM card fees, and software costs primarily as a result of the FSB acquisition.
The higher level of FDIC insurance expense reflects the benefit of the FDIC's small bank assessment credit, which was taken in the 2019 fourth quarter.
There were no merger-related expenses in the fourth quarter of 2020 compared with costs relating to the FSB core system conversion during the third quarter of 2020, and legal and other professional services related to the initiation of the merger in the fourth quarter of 2019.
The Company's GAAP efficiency ratio, or noninterest expenses divided by the sum of net interest income and noninterest income, was 68.3% in the fourth quarter of 2020, 67.3% in the third quarter of 2020, and 72.5% in the fourth quarter of 2019. The Company's non-GAAP efficiency ratio, excluding amortization expense, gains and losses from investment securities, and merger-related expenses, was 67.7% compared with 66.3% in the third quarter of 2020 and 70.3% in last year's fourth quarter.
Income tax expense was $0.8 million, or an effective tax rate of 12.0%, for the fourth quarter of 2020 compared with 11.8% in the third quarter of 2020 and 20.9% in last year's fourth quarter. Excluding the impact of the first quarter 2020 historic tax credit transaction, the effective tax rate was 22.1% and 25.6% in the fourth and third quarters of 2020, respectively.
Balance Sheet Highlights
Total assets were down slightly at $2.04 billion as of December 31, 2020, compared with $2.06 billion at September 30, 2020, but increased 40% from $1.46 billion at December 31, 2019. The year-over-year increase reflects the addition of $323 million of assets, including $271 million of loans, from the FSB acquisition and the Company's loan growth over the last year, including the origination $203 million of PPP loans.
Investment securities were $167 million at December 31, 2020, $6 million higher than the end of the third quarter of 2020, and $36 million higher than at the end of last year's fourth quarter. The Company added $21 million of securities from FSB during the second quarter of 2020, and subsequently sold $23 million of securities during the third quarter of 2020. The primary objectives of the Company's investment portfolio are to provide liquidity, secure municipal deposits, and maximize income while preserving the safety of principal.
Total deposits of $1.77 billion declined $10 million, or 1%, from September 30, 2020, but were up $504 million, or 40%, from the end of last year's fourth quarter. The increase from the prior year reflects $239 million of deposits from FSB and an accumulation of liquidity by commercial customers in response to the pandemic, including deposits related to PPP loans, and increases in consumer deposits from government stimulus payments and lower consumer spending. The slight decrease from the sequential third quarter largely reflects seasonally lower municipal deposits.
The Company has consistently maintained regulatory capital ratios measurably above the Federal "well capitalized" standard, including a Tier 1 leverage ratio of 8.21% at December 31, 2020 compared with 7.82% at September 30, 2020 and 10.33% at December 31, 2019. Book value per share was $31.21 at December 31, 2020 compared with $30.29 at September 30, 2020 and $30.11 at December 31, 2019.
For the full year of 2020, cash dividends totaled $1.16, up 12% over 2019.
2020 Year in Review (compared with prior-year period)
Net interest income was $59.8 million, up 15%, primarily due to the growth of interest earning assets from the loans acquired in the FSB acquisition and the origination of PPP loans. However, the increase was muted by both low commercial loan growth and net interest margin compression. Net interest margin was 3.37%, a decrease of 45 basis points, which largely reflects the Federal Reserve's decrease of the fed 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.
The Company's provision for loan losses of $5.4 million was up significantly from $75 thousand due to the impacts on the economy from the COVID-19 pandemic. A decrease in asset quality resulted from the elevated risk associated with the hotel portfolio, which increased the Company's criticized loans. The ratio of non-performing loans to total loans was 1.66% compared with 1.17%.
Non-interest income was up $0.2 million at $18.2 million. The Company had a net loss of $0.6 million as a result of the recognition of a historic tax credit transaction. Additionally, deposit service charges were down $0.3 million due to certain fees that had been temporarily suspended during the second quarter of 2020 to assist customers affected by COVID-19. These decreases were offset by gains on sale of investment securities and the sale of the previous administrative headquarters.
Non-interest expense increased $12 million, or 25%, to $59.9 million. The Company had merger-related expense in connection with the acquisition of FSB of $6.0 million. Additionally, higher salaries and employee benefits of $3.4 million, or 11%, due to the addition of new employees from FSB and merit increases. Occupancy expense was up $0.9 million also reflecting the addition of FSB. Technology expenses were up 27%, or $1.1 million, to $5.2 million largely due to increased software costs, volume related ATM card fees and online banking activity, primarily as a result of the FSB acquisition and COVID-19 impact. FDIC insurance expense increased $0.7 million, as a result of growth in assets and the reduction of prior year expenses due to the application of the FDIC's small bank assessment credit, which was not applicable in 2020.
The Company's GAAP efficiency ratio was 76.7% in 2020 compared with 68.2% in 2019, and the non-GAAP efficiency ratio, as previously defined, was 68.5% compared with 67.2%.
Income tax expense for the year was $1.6 million, representing an effective tax rate of 12.2% compared with an effective tax rate of 23.5% in 2019. Excluding the impact of the historic tax credit transactions, the effective tax rate was 23.9% in 2020.
Webcast and Conference Call
The Company will host a conference call and webcast on Thursday, February 4, 2021 at 4:45 p.m. ET. Management will review the financial and operating results for the fourth quarter of 2020, as well as the Company's strategy and outlook. A question and answer session will follow the formal presentation.
The conference call can be accessed by calling (201) 689-8471. Alternatively, the webcast can be monitored at www.evansbancorp.com.
A telephonic replay will be available from 7:45 p.m. ET on the day of the teleconference until Thursday, February 11, 2021. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13714792, or access the webcast replay at www.evansbancorp.com, where a transcript will be posted once available.
About Evans Bancorp, Inc.
Evans Bancorp, Inc. is a financial holding company and the parent company of Evans Bank, N.A., a commercial bank with $2.0 billion in assets and $1.8 billion in deposits at December 31, 2020. Evans is a full-service community bank with 20 financial centers providing comprehensive financial services to consumer, business and municipal customers throughout Western New York. Evans Insurance Agency, a wholly owned subsidiary, provides life insurance, employee benefits, and property and casualty insurance through ten offices in the Western New York region. Evans Investment Services provides non-deposit investment products, such as annuities and mutual funds.
Evans Bancorp, Inc. and Evans Bank routinely post news and other important information on their websites, at www.evansbancorp.com and www.evansbank.com.
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