Evans Bancorp Net Income Increases 29% to $4.8 Million in the 2018 Third 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 third quarter ended September 30, 2018.

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

• Net income increased 29% to $4.8 million; Earnings per diluted share grew 28% to $0.97
• Net interest income increased 9% to $12.1 million
• Loan portfolio of $1.2 billion up $30 million in the quarter, or 11% on an annualized basis
• 9% growth of average demand deposits
• Acquisition of Richardson & Stout Insurance Agency (“R&S”) contributed to total insurance revenue of $3.2 million, an increase of 48%
• Recognized $350,000 of community investments in the third quarter

Net income was $4.8 million, or $0.97 per diluted share, in the third quarter of 2018, compared with $3.8 million, or $0.77 per diluted share, in the trailing second quarter of 2018 and $3.7 million, or $0.76 per diluted share, in last year’s third quarter. The increase over both comparative periods reflects higher interest income due to loan growth, an increase in non-interest income due to higher insurance revenue and lower income tax provision. Return on average equity was 15.35% for the third quarter of 2018, compared with 12.39% in the trailing second quarter of 2018 and 12.71% in the third quarter of 2017.

“Evans continues to experience meaningful client growth both organically and through acquisition. The strong performance in loans and deposits and the significant increase in insurance revenue is evidence of our expanding market presence,” said David J. Nasca, President and CEO of Evans Bancorp. “The new business we are capturing has allowed us to offset margin pressures related to interest rate increases and significant competition for funding. Successful results have enabled us to execute our plan to make significant community investments, the details of which will be announced in the next several weeks.”

Net Interest Income
($ in thousands)
				3Q 2018			2Q 2018			3Q 2017
Interest income				$	14,690		$	14,247		$	12,574
Interest expense					2,604			2,051			1,479
Net interest income					12,086			12,196			11,095
Provision for loan losses					252			659			161
Net interest income after provision				$	11,834		$	11,537		$	10,934

Net interest income decreased $0.1 million from the second quarter of 2018, but increased $1.0 million, or 9%, from the prior-year third quarter. The year-over-year increase was driven by average interest-earning asset growth, particularly loans, partially offset by an increase in interest expense. Average commercial loans, including commercial real estate and commercial and industrial loans, were $918 million, up $20 million from the second quarter of 2018 and up $129 million from the 2017 third quarter. The net interest income decrease from the second quarter reflects net interest margin compression, offset by higher interest income from loan growth.

Third quarter net interest margin of 3.73% decreased 16 basis points from the 2018 second quarter, and 18 basis points from the third quarter of 2017. Net interest income in last year’s third quarter benefited $0.4 million, or 14 basis points to net interest margin, from the repayment in full of two unrelated loans that were formerly in nonaccrual status.

Margin has been impacted by rising funding costs. The cost of interest-bearing liabilities was 1.04% compared with 0.86% in the second quarter of 2018 and 0.69% in the third quarter of 2017. The increase in short-term market interest rates, along with a very competitive deposit market caused the increase in funding costs. The Company has experienced a shift in deposit mix as consumers in low-cost legacy savings deposit products have migrated to higher-rate time deposits. The Company has also increased its brokered time deposit activity as part of its funding strategy. Average time deposits comprised 23% of average total deposits during the third quarter of 2018 compared with 19% and 16% in the second quarter of 2018 and the third quarter of 2017, respectively.

The $0.3 million provision for loan losses for the third quarter of 2018 reflects loan growth and an increase in net charge-offs. The second quarter 2018 provision included the impact of an increase in non-performing loans during the quarter as a single commercial construction loan of $9 million was downgraded to nonaccrual status.

Asset Quality
($ in thousands)
				3Q 2018				2Q 2018				3Q 2017
Total non-performing loans				$	23,090			$	23,210			$	13,389
Total net loan charge-offs (recoveries)					274				117				157
Non-performing loans/ Total loans					2.00	%			2.06	%			1.34	%
Net loan charge-offs (recoveries)/ Average loans					0.10	%			0.04	%			0.06	%
Allowance for loan losses/ Total loans					1.32	%			1.35	%			1.42	%

“Our credit quality metrics have remained consistent during the quarter. We are persistent in our efforts to strengthen the performance of the small number of larger commercial credits that make up the non-performing loan balance,” stated John Connerton, Chief Financial Officer of Evans Bank. “Based on these efforts and management’s analysis, we believe we remain appropriately reserved.”

Non-Interest Income
($ in thousands)
				3Q 2018				2Q 2018			3Q 2017
Deposit service charges				$	571			$	525		$	448
Insurance service and fee revenue					3,215				1,952			2,169
Bank-owned life insurance					165				178			128
Loss on tax credit investment					(165	)			-			(1,338	)
Refundable NY state historic tax credit					150				-			972
Other income					828				984			986
Total non-interest income				$	4,764			$	3,639		$	3,365

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

Evans acquired the business of R&S effective July 1, 2018, which contributed $0.8 million in revenue in the quarter. The remaining increase was due to seasonally higher profit-sharing revenue.

The decrease in other income was due to the loss on sale of equity securities of $0.1 million in the third quarter of 2018.

Historic tax credit investment activity resulted in a net loss of $0.4 million being recorded in non-interest income in the third quarter of 2017. There were no new significant historic tax credit investments in the third quarter of 2018.

Non-Interest Expense
($ in thousands)
				3Q 2018			2Q 2018			3Q 2017
Salaries and employee benefits				$	7,090		$	6,475		$	6,271
Occupancy					795			727			805
Advertising and public relations					258			326			311
Professional services					588			626			514
Technology and communications					874			847			730
Amortization of intangibles					112			28			28
FDIC insurance					295			246			195
Other expenses					1,445			958			982
Total non-interest expenses				$	11,457		$	10,233		$	9,836

Third quarter non-interest expenses increased 16% from the prior-year period and 12% from the second quarter of 2018. The most significant component of the increase was due to higher salaries and employee benefits relating to the R&S acquisition and the addition of strategic personnel hires to support the Company’s continued growth.

The increase in technology and communications from last year’s third quarter was due to an increase in ATM card fees and online banking activity.

The amortization of intangible assets was higher due to the acquisition of R&S.

The increase in other expenses reflects a community contribution accrual of $0.4 million during the third quarter of 2018. Evans contributes to community organizations that provide positive, meaningful impact to the Western New York region. Evans has elevated its resource commitment to the community in response to the benefits it has received through federal tax reform.

The Company’s efficiency ratio in the third quarter of 2018 was 66.9% compared with 64.5% in the second quarter of 2018 and 66.2% in last year’s third quarter.

Income tax expense was $0.3 million, or an effective tax rate of 6.7%, for the third quarter of 2018 compared with $1.2 million, or 23.3%, in the second quarter of 2018 and $0.7 million, or 16.6%, in last year’s third quarter. Income taxes were reduced by $0.7 million in the current quarter due to a change in estimate of when certain state historic tax credits will be taxable for federal purposes. The Company has determined that these tax credits will be subject to lower federal tax rates resulting from recent tax reform. Historic tax credit transactions lowered the effective tax rate by 13.8% in the third quarter of 2018 compared with no impact on the second quarter of 2018, and 12.4% in last year’s third quarter. The effective rate in the second and third quarters of 2018 also 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 $1.38 billion as of September 30, 2018, up $35 million from June 30, 2018 and $161 million, or 13%, higher than $1.22 billion at September 30, 2017, reflecting the Company’s strong loan growth. Loan balances grew $158 million, or 16%, to $1.16 billion since the end of last year’s third quarter with the growth predominantly in the commercial real estate and commercial and industrial portfolios.

Investment securities were $138 million at September 30, 2018, $11 million lower than the second quarter of 2018, and $15 million lower than at the end of last year’s third 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. With the yield curve continuing to flatten, there is a reduced advantage to purchasing longer-term investment securities and as a result, there has been a corresponding increase in the Company’s short-term investments and interest-earning cash.

Total deposits grew $33 million during the quarter to $1.22 billion at September 30, 2018, and were $183 million, or 18%, higher than the balance at the end of last year’s third quarter. The largest component of the deposit growth during the quarter was in time deposits of $53 million, including $12 million of brokered time deposits. Total average demand deposits were $233 million for the 2018 third quarter, an increase of $19 million from the third quarter of 2017, which was mostly attributable to growth in commercial demand deposits.

The Company experienced growth of $9 million in its commercial deposit portfolio during the third quarter of 2018. Municipal deposits decreased $10 million when compared with the balance at June 30, 2018 due to seasonal fluctuations. 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 $20 million during the quarter, while consumer time deposits grew $41 million in the past three months and $97 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 9.60% at September 30, 2018 compared with 9.94% at June 30, 2018 and 10.38% at September 30, 2017. Book value per share increased to $26.03 at September 30, 2018 compared with $25.63 at June 30, 2018 and $24.60 at September 30, 2017.

Outlook

Mr. Nasca concluded, “We have delivered net income growth of 25% in the first nine months of 2018 on the heels of last year’s historic performance, providing a strong foundation of growth and momentum to finish the year. In addition, the opening of a new Business and Relationship Center in the downtown core of Buffalo will allow us to continue our expansion and proactively meet the needs of a resurgent Western New York economy.”

Webcast and Conference Call

The Company will host a conference call and webcast on Thursday, October 25, 2018 at 4:45 p.m. ET. Management will review the financial and operating results for the third 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 [phone]. 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, November 1, 2018. To listen to the archived call, dial [phone] and enter conference ID number 13683725, 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 $1.4 billion in assets and $1.2 billion in deposits at September 30, 2018. Evans is a full-service community bank, with 15 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 ten 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.

EVANS BANCORP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA (UNAUDITED)
(in thousands, except shares and per share data)
				9/30/2018				6/30/2018				3/31/2018				12/31/2017				9/30/2017
ASSETS
Investment Securities				$	137,909			$	148,628			$	164,471			$	149,732			$	153,367
Loans					1,155,566				1,125,895				1,109,961				1,065,315				998,005
Allowance for loan losses					(15,213	)			(15,235	)			(14,693	)			(14,019	)			(14,182	)
Goodwill and intangible assets					13,104				8,496				8,525				8,553				8,581
All other assets					89,557				78,307				85,434				86,052				74,383
Total assets				$	1,380,923			$	1,346,091			$	1,353,698			$	1,295,633			$	1,220,154
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand deposits					236,079				224,373				238,827				219,664				216,250
NOW deposits					110,768				121,170				124,997				109,378				96,741
Savings deposits					574,262				595,500				566,314				535,730				552,559
Time deposits					294,514				241,425				204,295				186,457				166,769
Total deposits					1,215,623				1,182,468				1,134,433				1,051,229				1,032,319
Borrowings					24,309				25,348				83,114				108,869				54,310
Other liabilities					15,331				14,700				16,278				17,193				16,033
Total stockholders' equity					125,660				123,575				119,873				118,342				117,492
SHARES AND CAPITAL RATIOS
Common shares outstanding					4,827,701				4,821,381				4,803,334				4,782,505				4,776,360
Book value per share				$	26.03			$	25.63			$	24.96			$	24.74			$	24.60
Tier 1 leverage ratio					9.60	%			9.94	%			9.81	%			10.11	%			10.38	%
Tier 1 risk-based capital ratio					11.34	%			11.63	%			11.48	%			11.72	%			12.33	%
Total risk-based capital ratio					12.59	%			12.88	%			12.73	%			12.97	%			13.59	%
ASSET QUALITY DATA
Total non-performing loans				$	23,090			$	23,210			$	14,771			$	13,715			$	13,389
Total net loan charge-offs (recoveries)					274				117				93				765				157
Non-performing loans/Total loans					2.00	%			2.06	%			1.33	%			1.29	%			1.34	%
Net loan charge-offs (recoveries)/Average loans					0.10	%			0.04	%			0.03	%			0.30	%			0.06	%
Allowance for loans losses/Total loans					1.32	%			1.35	%			1.32	%			1.32	%			1.42	%

EVANS BANCORP, INC AND SUBSIDIARIES
SELECTED OPERATIONS DATA (UNAUDITED)
(in thousands, except share and per share data)
				2018				2018				2018				2017				2017
				Third Quarter				Second Quarter				First Quarter				Fourth Quarter				Third Quarter
Interest income				$	14,690			$	14,247			$	13,366			$	12,794			$	12,574
Interest expense					2,604				2,051				1,914				1,634				1,479
Net interest income					12,086				12,196				11,452				11,160				11,095
Provision for loan losses					252				659				767				602				161
Net interest income after provision					11,834				11,537				10,685				10,558				10,934
Deposit service charges					571				525				509				481				448
Insurance service and fee revenue					3,215				1,952				1,965				1,649				2,169
Bank-owned life insurance					165				178				171				464				128
Loss on tax credit investment					(165	)			-				-				(1,740	)			(1,338	)
Refundable NY state historic tax credit					150				-				-				1,224				972
Other income					828				984				1,141				949				986
Total non-interest income					4,764				3,639				3,786				3,027				3,365
Salaries and employee benefits					7,090				6,475				6,627				6,248				6,271
Occupancy					795				727				758				844				805
Advertising and public relations					258				326				124				378				311
Professional services					588				626				653				594				514
Technology and communications					874				847				764				740				730
Amortization of intangibles					112				28				28				29				28
FDIC insurance					295				246				232				189				195
Other expenses					1,445				958				985				1,364				982
Total non-interest expenses					11,457				10,233				10,171				10,386				9,836
Income before income taxes					5,141				4,943				4,300				3,199				4,463
Income tax provision					346				1,152				981				2,207				740
Net income					4,795				3,791				3,319				992				3,723
PER SHARE DATA
Net income per common share-diluted				$	0.97			$	0.77			$	0.68			$	0.20			$	0.76
Cash dividends per common share				$	0.46			$	-			$	0.46			$	-			$	0.40
Weighted average number of diluted shares					4,940,822				4,933,522				4,912,289				4,904,270				4,896,967
PERFORMANCE RATIOS
Return on average total assets					1.40	%			1.13	%			1.01	%			0.32	%			1.24	%
Return on average stockholders' equity					15.35	%			12.39	%			11.15	%			3.32	%			12.71	%
Efficiency ratio					66.88	%			64.45	%			66.56	%			70.44	%			66.15	%

EVANS BANCORP, INC AND SUBSIDIARIES
SELECTED AVERAGE BALANCES AND YIELDS/RATES (UNAUDITED)
(in thousands)
				2018				2018				2018				2017				2017
				Third Quarter				Second Quarter				First Quarter				Fourth Quarter				Third Quarter
AVERAGE BALANCES
Loans, net				$	1,127,173			$	1,098,391			$	1,067,282			$	1,009,497			$	970,988
Investment securities					145,122				155,089				160,739				155,475				152,991
Interest-bearing deposits at banks					12,641				4,013				2,712				2,380				1,713
Total interest-earning assets					1,284,936				1,257,493				1,230,733				1,167,352				1,125,692
Non interest-earning assets					87,402				81,113				80,644				79,234				72,887
Total Assets				$	1,372,338			$	1,338,606			$	1,311,377			$	1,246,586			$	1,198,579
NOW					115,417				120,510				114,268				92,089				91,962
Savings					581,484				576,197				552,546				549,466				545,900
Time deposits					274,275				214,410				194,223				181,291				163,087
Total interest-bearing deposits					971,176				911,117				861,037				822,846				800,949
Other borrowings					25,749				50,917				92,893				70,986				51,224
Total interest-bearing liabilities					996,925				962,034				953,930				893,832				852,173
Demand deposits					233,393				239,546				223,176				219,291				214,228
Other non-interest bearing liabilities					17,045				14,614				15,161				14,097				15,035
Stockholders' equity					124,975				122,412				119,110				119,366				117,143
Total Liabilities and Equity				$	1,372,338			$	1,338,606			$	1,311,377			$	1,246,586			$	1,198,579
YIELD/RATE
Loans, net					4.81	%			4.82	%			4.70	%			4.65	%			4.76	%
Investment securities					2.60	%			2.67	%			2.51	%			2.45	%			2.35	%
Interest-bearing deposits at banks					1.98	%			1.50	%			1.50	%			0.67	%			1.62	%
Total interest-earning assets					4.54	%			4.54	%			4.40	%			4.35	%			4.43	%
NOW					0.27	%			0.26	%			0.27	%			0.22	%			0.22	%
Savings					0.70	%			0.59	%			0.55	%			0.48	%			0.48	%
Time deposits					1.89	%			1.55	%			1.42	%			1.34	%			1.30	%
Total interest-bearing deposits					0.99	%			0.77	%			0.71	%			0.64	%			0.62	%
Other borrowings					2.96	%			2.30	%			1.82	%			1.71	%			1.76	%
Total interest-bearing liabilities					1.04	%			0.86	%			0.81	%			0.73	%			0.69	%
Interest rate spread					3.50	%			3.68	%			3.59	%			3.62	%			3.74	%
Contribution of interest-free funds					0.23	%			0.21	%			0.18	%			0.17	%			0.17	%
Net interest margin					3.73	%			3.89	%			3.77	%			3.79	%			3.91	%

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