Evans Bancorp Net Income Increases 45% to $3.8 Million in the 2018 Second Quarter

Evans Bancorp, Inc. (the "Company” or "Evans”) (NYSE American:EVBN), a community financial services company serving Western New York since 1920, today reported its results of operations for the second quarter ended June 30, 2018.

SECOND QUARTER 2018 HIGHLIGHTS (compared with prior-year period unless otherwise noted)

• Net income of $3.8 million, up 45%; Earnings per diluted share grew 43% to $0.77
• Net interest income increased 21% to $12.2 million
• Net interest margin of 3.89% increased 15 basis points
• Loan portfolio of $1.1 billion, up $16 million in the quarter, or 6% on an annualized basis
• Annualized growth of 29% on average core demand deposits
• Efficiency ratio improvement to 64.5% from 68.9%

Net income was $3.8 million, or $0.77 per diluted share, in the second quarter of 2018 compared with $3.3 million, or $0.68 per diluted share, in the first quarter of 2018 and $2.6 million, or $0.54 per diluted share, in last year’s second quarter. The increase over both comparative periods primarily reflects higher net interest income due to loan growth and net interest margin expansion. Return on average equity was 12.39% for the second quarter of 2018 compared with 11.15% in the first quarter of 2018 and 9.13% in the second quarter of 2017.

"Our results reflect another strong quarter of performance, providing solid momentum for the first half of the year as we continue to execute our growth strategy,” said David J. Nasca, President and CEO of Evans Bancorp. "We have focused on investing in our business and operations to support our clients and expand key business lines beyond commercial and retail banking. Our recently announced third quarter acquisition of the Richardson & Stout Insurance Agency will expand our management bench strength and geographic footprint while also positioning us for future growth in employee benefits and municipal banking.”

Net interest income increased $0.7 million, or 7%, from the first quarter of 2018 and $2.1 million, or 21%, from the prior-year second quarter. The increase was driven by average interest-earning asset growth, particularly loans. Average commercial loans, including commercial real estate and commercial and industrial loans, were $898 million in the second quarter, 3% higher than $872 million in the first quarter of 2018 and 18% higher than $763 million in the 2017 second quarter.

Second quarter net interest margin of 3.89% increased 12 basis points from the 2018 first quarter and 15 basis points from the second quarter of 2017. Loan yields benefited from variable loan re-pricing as the Federal Reserve increased its target rate by 125 basis points since March 2017. Loan yields were 4.82% in the second quarter compared with 4.70% in the first quarter of 2018 and 4.54% in last year’s second quarter. The benefit of higher loan yields was partially offset by increased funding costs, reflecting higher deposit and wholesale borrowing rates. The cost of interest-bearing liabilities was 0.86% compared with 0.81% in the first quarter of 2018 and 0.65% in the second quarter of 2017.

The $0.7 million provision for loan losses for the second quarter of 2018 reflects an increase in non-performing loans in the quarter due to a single commercial construction loan of $9 million that was downgraded to nonaccrual status after it exceeded its original maturity date and the Bank did not agree to an extension.

"Due to the relative size of a number of larger commercial loans we have in relation to our total portfolio, downgrades in a small number or even one relationship can create variability in our asset quality ratios. Historically, we have experienced increases in the non-performing loan ratio, but were still able to maintain a low charge-off ratio,” stated John Connerton, Chief Financial Officer of Evans Bank. "Based on management’s analysis and a current collateral valuation, management considers the loan to be adequately reserved.”

The increase in deposit service charges reflects higher fees related to overdrafts as the Company introduced a new product to clients that provides overdraft protection to small businesses.

The quarter-over-quarter increase in insurance revenue was due to higher commercial lines, employee benefits and financial services revenues, offset by a reduction in personal lines and claims services revenue.

The changes in other income, when compared with the first quarter of 2018 and the prior-year period, are due to fair value adjustments to the Company’s mortgage servicing rights asset and equity securities.

There were no new historic tax credit investments in the second quarter of 2018. On a comparative basis, historic tax credit investment activity resulted in a net loss of $0.3 million being recorded in non-interest income in the second quarter of 2017.

Second quarter non-interest expenses increased 10% from the prior-year period, but less than 1% when compared with the first quarter of 2018. The most significant component of the year-over-year increase was higher salaries and benefit costs, reflecting strategic personnel hires to support the Company’s continued growth. The first quarter of 2018 included approximately $250,000 in expense related to the previously announced one-time $1,000 bonus paid to non-senior associates in recognition of their superior efforts.

Advertising expenses increased due to promotional campaigns for the Company’s deposit products.

The Company’s efficiency ratio in the second quarter of 2018 improved to 64.5% from 66.6% in the first quarter of 2018 and 68.9% in last year’s second quarter. The improvement reflects the Company’s significant net interest income growth and a focus on expense management.

Income tax expense was $1.2 million, or an effective tax rate of 23.3%, for the second quarter of 2018 compared with $1.0 million, or 22.8%, in the first quarter of 2018 and $0.9 million, or 24.8%, in last year’s second quarter. The effective tax rate for the second quarter of 2017 reflects the benefit of historic tax credit investment transactions. Excluding the impact of the historic tax credits, the effective tax rate for the second quarter of 2017 was 29.3%. The lower effective rate in the first and second quarters of 2018 reflects the benefit of federal tax reform, which decreased the Company’s marginal federal income tax rate from 35% to 21%.

Balance Sheet Highlights

Total assets were $1.35 billion as of June 30, 2018, relatively flat with March 31, 2018 and 14% higher from $1.18 billion at June 30, 2017, reflecting the Company’s strong loan growth. Loans were up $149 million, or 15%, to $1.13 billion since the end of last year’s second quarter, with the growth predominantly in the commercial real estate and commercial and industrial portfolios.

Investment securities were $149 million at June 30, 2018, $16 million lower than the first quarter of 2018, but $5 million higher than at the end of last year’s second quarter. The primary objectives of the Company’s investment portfolio are to provide liquidity, provide collateral to secure municipal deposits, and maximize income while preserving safety of principal. The decline in securities since the end of the first quarter reflects a reduced need to collateralize municipal deposits.

Total deposits grew $48 million during the quarter to $1.18 billion at June 30, 2018, and were $163 million, or 16%, higher than the balance at the end of last year’s second quarter. The largest component of the deposit growth during the quarter was in time deposits of $37 million, including $19 million of brokered time deposits. Total average demand deposits were $240 million for the 2018 second quarter, an increase of $16 million, or 29% on an annualized rate, from the first quarter of 2018. Average demand deposits were 17% higher than last year’s second quarter, which was mostly attributable to growth in commercial demand deposits.

The Company experienced solid growth of $24 million in its commercial deposit portfolio during the second quarter of 2018. Municipal deposits remained relatively flat at the end of the second quarter of 2018 when compared with the balance at March 31, 2018. Consumer savings deposit growth has been challenging as preferences move toward term products with higher rates and local market competition has stiffened. Consumer savings deposits declined $14 million during the quarter, while consumer time deposits grew $18 million in the past three months and $58 million in the past year.

Capital Management

The Company consistently maintains regulatory capital ratios measurably above the Federal "well capitalized” standard, including a Tier 1 leverage ratio of 10.03% at June 30, 2018 compared with 9.81% at March 31, 2018 and 10.57% at June 30, 2017. Book value per share increased to $25.63 at June 30, 2018 compared with $24.96 at March 31, 2018 and $24.21 at June 30, 2017.

Outlook

Mr. Nasca concluded, "Evans has made great progress and has delivered strong results with high-quality products and services, value-added relationships, and customized solutions delivered by a talented and experienced team. We are looking forward to the opening of our Business and Relationship Center in downtown Buffalo in the third quarter, which will allow us to more closely serve the invigorated WNY business sector. This Center will also be home to our community-focused initiatives and our Community Development and Community Investment teams.”

Webcast and Conference Call

The Company will host a conference call and webcast on Thursday, July 26, 2018 at 4:45 p.m. ET. Management will review the financial and operating results for the second quarter of 2018, 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, August 2, 2018. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13680881, 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 $1.3 billion in assets and $1.2 billion in deposits at June 30, 2018. Evans is a full-service community bank, with 14 financial centers providing comprehensive financial services to consumer, business and municipal customers throughout Western New York. Evans Bancorp's wholly owned insurance subsidiary, The Evans Agency, LLC, provides life insurance, employee benefits, and property and casualty insurance through nine insurance 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.

Safe Harbor Statement: This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements concerning future business, revenue and earnings. These statements are not historical facts or guarantees of future performance, events or results. There are risks, uncertainties and other factors that could cause the actual results of Evans Bancorp to differ materially from the results expressed or implied by such statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include competitive pressures among financial services companies, interest rate trends, general economic conditions, changes in legislation or regulatory requirements, effectiveness at achieving stated goals and strategies, and difficulties in achieving operating efficiencies. These risks and uncertainties are more fully described in Evans Bancorp’s Annual and Quarterly Reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. Evans Bancorp undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.

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