Evans Bancorp Reports Fourth Quarter and Full Year 2008 Earnings

Evans Bancorp, Inc. (NASDAQ: EVBN):

• Net income increases 45.7% to $4.91 million in 2008; net operating income increases 2.8% to $5.32 million.
• Net interest income increased 13.2% in fourth quarter compared with the prior year.
• Fourth quarter net income was $0.51 million; impacted by increased provision for loan and lease losses, continued soft insurance market, and costs of new branch and brand building investments.
• Net loans and leases increase 25.7% in 2008, total deposits increase 24.0%

Evans Bancorp, Inc. (the “Company”) (NASDAQ: EVBN), a community financial services company serving Western New York, today reported its results of operations for the quarter and year ended December 31, 2008.

Net income for the fourth quarter of 2008 was $0.51 million, or $0.18 per diluted share, a decrease of $0.30 million, or 37.3%, from net income of $0.81 million, or $0.29 per diluted share, in the fourth quarter of 2007. Return on average equity was 4.37% for the quarter, compared with 7.55% in last year’s fourth quarter. For the year ended December 31, 2008, net income was $4.91 million, or $1.78 per diluted share, an increase of $1.54 million, or 45.7%, from $3.37 million, or $1.23 per diluted share, in 2007. The increase in net income was partially due to the sale during the second quarter of 2007 of $45 million of securities at an after-tax loss of $1.41 million, or $0.51 per diluted share, as the Company restructured its balance sheet. The return on average equity was 10.82% and 8.15% for the year ended December 31, 2008 and 2007, respectively.

“Net operating income” (as defined in the following Supplemental Non-GAAP Disclosure) is net income adjusted for what management considers to be “non-operating” items. Net operating income for the fourth quarter of 2008 was $0.62 million, or $0.22 per diluted share, a decrease of $0.30 million, or 32.9%, from net operating income of $0.92 million, or $0.33 per diluted share, in the fourth quarter of 2007. For the year ended December 31, 2008, net operating income of $5.32 million, or $1.93 per diluted share, was 2.8% higher than net operating income of $5.17 million, or $1.89 per diluted share, in 2007.

“We made solid headway in 2008 toward building a stronger brand, improving our market presence and strengthening our balance sheet. We ended the year poised, strategically and financially, to continue to grow market share despite 2008 being one of the worst years the financial services industry has faced. For the year, our assets grew nearly 20% with loan growth of 25.7%,” stated David J. Nasca, President and CEO of Evans Bancorp. “In the fourth quarter, we were able to grow net interest income before the provision for loan and lease losses by more than 13% as a result of strong growth in both our loan and deposit portfolios and pricing discipline. In the quarter, we made a sizable provision for loan and lease losses, which is reflective of the challenges of the current economy. We have invested in broadening recognition of our services and capabilities in Western New York and believe these investments are critical to our long-term growth.”

Supplemental Non-GAAP Disclosure

To provide investors with greater visibility of the Company’s operating results, in addition to the results measured in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company provides supplemental reporting on "net operating income,” which excludes items that management believes to be non-operating in nature. Specifically, net operating income excludes gains and losses on the sale of securities and the amortization of acquisition-related intangible assets. This non-GAAP information is being disclosed because management believes that providing these non-GAAP financial measures provides investors with information useful in understanding the Company’s financial performance, its performance trends, and financial position. While the Company’s management uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it necessarily comparable with non-GAAP measures which may be presented by other companies. See the reconciliation of net operating income and diluted net operating earnings per share to GAAP net income and GAAP diluted earnings per share in the following table:

* After any tax-related effect

Net Interest Income

Net interest income during the fourth quarter of 2008 increased to $4.95 million, an increase of $0.58 million, or 13.2%, from $4.37 million in the fourth quarter of 2007. Loan and lease growth and the reduced cost of interest-bearing liabilities were the main factors in the increase. Net loans and leases were $401.6 million at December 31, 2008, an increase of 5.8% from $379.4 million at September 30, 2008 and an increase of 25.7% from $319.6 million at December 31, 2007. Much of the growth continues to be in the Company’s commercial real estate portfolio. Commercial real estate has historically been the largest component of the Company’s loan portfolio. Management’s wealth of experience in this type of lending has allowed the Company to grow the portfolio in a difficult environment while maintaining their historically conservative underwriting approach.

Total deposits were $404.0 million at December 31, 2008, an increase of 0.1% from $403.5 million at September 30, 2008 and an increase of 24.0% from $325.8 million at December 31, 2007. The Company established a new retail money market product during May of this year and its success has been the primary driver of deposit growth for the year. However, a decline in time deposits offset growth in total deposits in the fourth quarter. While local competition for time deposits dictated unfavorable pricing conditions, short-term wholesale funding rates plummeted after several cuts of the overnight federal funds rate by the Federal Reserve. Therefore, the Company utilized low-cost wholesale funds rather than locking in certificates of deposit at unfavorable rates. One of the Company’s primary objectives is to grow its core funding through non-interest bearing checking accounts. Because demand deposit balances fluctuate day-to-day based on the high volume of transactions normally associated with the demand product, average demand deposit growth is a better measure of sustained growth. In the fourth quarter of 2008, the Company’s average demand deposits were up 1.2% from the third quarter of 2008 and were 4.1% higher than the prior year’s fourth quarter.

Mr. Nasca noted, “We have historically maintained a strong, low cost core deposit base and are focused on increasing that base by expanding our presence and market share in our operating footprint and providing high quality, personalized services for small and middle market businesses and the individuals we serve.”

The Company’s net interest margin remains high by industry standards at 4.32% in the fourth quarter of 2008, compared with 4.36% in the fourth quarter of the prior year. However, the Company’s net interest margin for the fourth quarter decreased from 4.67% in the third quarter of 2008 as a result of aggressive decreases in interest rates by the Federal Reserve during the fourth quarter. For the quarter, loan and investment yields declined 43 basis points (“bps”) quarter over quarter, while the cost of funds declined only 10 bps. As overnight wholesale rates dropped sharply, deposit pricing remained competitive as banks concerned about liquidity were slow to lower deposit rates.

Allowance for Loan and Lease Losses and Asset Quality

Net charge-offs to average total loans and leases increased to 0.71% compared with 0.59% in the third quarter of 2008 and 0.33% for the 2007 fourth quarter. The increase in net charge-offs was primarily related to the direct finance commercial lease portfolio. The ratio of non-performing loans and leases to total loans and leases increased to 0.88% at December 31, 2008, compared with 0.20% at September 30, 2008 and 0.22% at the end of last year’s fourth quarter. The increase in non-performing loans and leases of $2.8 million was primarily a result of a small number of large commercial loans ($2.3 million) and further weakness in the leasing portfolio ($0.3 million). The increased net charge-offs combined with continued strong loan growth resulted in an increase in the provision for loan and lease losses to $1.70 million in the fourth quarter of 2008, compared with $0.58 million in the third quarter of 2008 and $0.97 million in the fourth quarter of 2007. The allowance for loan and lease losses to total loans and leases ratio was 1.49% at December 31, 2008, compared with 1.32% at September 30, 2008, and 1.41% at December 31, 2007.

Gary Kajtoch, Senior Vice President and CFO of Evans Bank, the Company’s wholly-owned subsidiary, commented, “As we have discussed previously, our direct financing lease portfolio is more susceptible to weakness in a troubled economy than our traditional commercial and consumer loans as evidenced by the increased charge-offs in our leasing portfolio in the fourth quarter. Because we expect direct leasing to continue to be sensitive to the performance of the economy, our portfolio managers and senior management continue to carefully monitor this portfolio. Steps have been taken to mitigate the portfolio’s risk, including the tightening of credit standards and consolidation of our broker network.”

Non-Interest Income

Non-interest income, which represented 32.8% of total revenue compared with 36.7% in last year’s fourth quarter, declined 4.3% to $2.42 million.

Insurance service and fee income, the largest component of non-interest income, improved 3.6% to $1.36 million for the fourth quarter of 2008. Financial services sales revenue was the fastest growing product line for The Evans Agency (“TEA”), the Company’s insurance agency subsidiary. However, other large components of non-interest income declined for the quarter. Deposit service charges declined 5.5% to $0.59 million due to decreased activity and bank-owned life insurance (“BOLI”) revenue declined from $0.15 million in revenue in last year’s fourth quarter to a loss of $0.03 million in the fourth quarter of 2008 as a result of market fluctuations.

Non-Interest Expense

Total non-interest expenses were $5.06 million for the fourth quarter of 2008, an increase of 8.1% from $4.68 million in the fourth quarter of 2007. Salaries and employee benefits decreased $0.06 million, or 2.4%, to $2.57 million for the quarter as the Company reversed its previous accrual for bonuses as the earnings targets in its incentive program were not met. The Company also had savings related to the freezing of its defined benefit pension plan in the first quarter of 2008. These factors were partially offset by the addition of new employees, including those working in the Company’s new branch office in Buffalo and from the acquisition of the Fitzgerald Agency in the third quarter of 2008, and increased matching contributions to the Company’s 401(k) savings plan. The $0.14 million increase in occupancy expenses was driven by the new branch office as well as new signage needed at various branch offices given the Company’s new brand and logo. Advertising and public relations expenses increased $0.08 million in the fourth quarter of 2008 compared with the prior year as a result of the Company’s new branding campaign. Professional services expenses increased $0.12 million in the fourth quarter of 2008 compared to the prior year due to increased auditor fees for attestation of the effectiveness of internal controls over financial reporting, the outsourcing of security services at two branches, and payment for increased systems programming. Other expenses increased $0.12 million from the fourth quarter of 2007 to $0.57 million in the fourth quarter of 2008. The increase was primarily due to higher FDIC assessment charges.

As a result of the increase in non-interest expenses, the efficiency ratio for the fourth quarter of 2008 increased to 66.2% from 65.1% in last year’s fourth quarter and 63.2% in the third quarter of 2008. The efficiency ratio has been negatively impacted by the soft insurance market. While TEA has been increasing revenues through acquisitions, the revenue growth has not been high enough to offset the growth in expenses.

Income tax expense totaled $0.11 million for the three month period ended December 31, 2008 reflecting an effective tax rate of 17.9%. The effective tax rate for the fourth quarter of last year was 35.7%. Through the first nine months of each year, the Company records an effective tax rate based on the expected rate for the entire year. The fourth quarter’s effective rate can vary depending on actual results.

2008 Year in Review

Net interest income for the year was $19.27 million, an increase of $2.59 million, or 15.6%, over 2007, primarily due to strong growth in the Company’s commercial loan and lease portfolio and a sharp decline in borrowing costs as a result of numerous interest rate cuts by the Federal Reserve. A steepened yield curve resulted in a widening of net interest margin from 4.05% in 2007 to 4.53% in 2008.

The Company’s provision for loan and lease losses increased from $1.92 million in 2007 to $3.51 million in 2008. The $1.59 million increase was a result of strong commercial loan and lease growth and increased net charge-offs in the leasing portfolio. The allowance for loan and lease losses to total loans and leases was 1.49% at the end of 2008, compared with 1.41% at December 31, 2007.

Non-interest income was $11.68 million for the year, up $2.83 million from 2007. Non-interest income in 2008 was positively impacted by a one-time gain on the curtailment of its defined benefit pension plan of $0.33 million in the first quarter of 2008, while 2007 was negatively impacted by the non-recurring loss of $2.3 million realized on the sale of securities in June 2007. Insurance revenue increased $0.32 million to $6.87 million as the insurance business benefited from two acquisitions of agencies in the last two years. These increases were somewhat offset by a decline in BOLI income of $0.41 million.

Non-interest expenses increased 6.6% to $20.44 million as the Company absorbed additional operating expenses associated with the opening of its 12th branch office in Buffalo, NY in August 2008 and the acquisition of two insurance agencies in the past two years. In addition, the Company made further hires in its back office operations and rolled out a new brand. The branding campaign incurred costs both in its research and development stage and then the subsequent implementation of the new brand on promotional material, branch signs, and elsewhere. Regulatory costs also increased with additional FDIC assessment charges and the cost of auditor fees related to the attestation of the effectiveness of internal controls over financial reporting.

The Company acquired Suchak Data Systems, Inc. (“SDS”), which serves the data processing needs of financial institutions with customized solutions, consultative services and state of the art technology, on December 31, 2008. The acquisition did not have a material impact on the financial results.

Capital Management

The Company consistently maintains regulatory capital ratios above the federal “well capitalized” standard of 6.00% with a Tier 1 leverage ratio of 9.02%. Average equity as a percentage of average assets was 9.06% in the three months ended December 31, 2008, compared with 9.39% in the three months ended September 30, 2008, and 9.46% in the three months ended December 31, 2007. Book value per outstanding common share was $16.57 at December 31, 2008, compared with $16.53 at September 30, 2008, and $15.74 at December 31, 2007.

Because of its strong capital position, the Company increased its dividend 10.8% to $0.41 per common share for shareholders of record on September 10, 2008, which was paid on October 2, 2008. The dividend payout ratio for 2008 was 43.74%.

Conclusion

Mr. Nasca concluded, “We made great progress in 2008 to build awareness in the Western New York market of our quality service and extensive product offerings. Importantly, despite the turbulence in the financial markets, we successfully managed our balance sheet to take advantage of the rapidly changing interest rate environment. We also continued to lay the foundation for future success with the opening of our 12th retail branch office in the Elmwood Village in Buffalo, the acquisition of Fitzgerald Insurance Agency, and the acquisition of SDS. While wary of the headwinds of an economy in recession, we believe we are well-positioned to realize solid performance in 2009 and continue to be excited about our future.”

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 $529 million in assets and $404 million in deposits at December 31, 2008. The bank has twelve branches located in Western New York. Evans National Leasing, Inc., an indirect wholly-owned subsidiary of Evans Bank is a general business equipment leasing company with customers throughout the U.S. Evans Bancorp's wholly-owned insurance subsidiary, The Evans Agency, provides retail property and casualty insurance through 15 insurance offices in the Western New York region. Evans Investment Services, a wholly-owned subsidiary of Evans Bank, 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 Web sites at www.evansbancorp.com and www.evansbank.com.

Safe Harbor Statement

This press 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.