United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended ~~September 30, 2019~~March 31, 2020

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to ______

Commission file number 001-35021

EVANS BANCORP, INC.

(Exact name of registrant as specified in its charter)

New York 16-1332767

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

One Grimsby Drive, Hamburg, NY 14075

(Address of principal executive offices) (Zip Code)

(716) 926-2000

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed

since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.50 par value	EVBN	NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large ~~Accelerated Filer~~accelerated filer ☐		Accelerated ~~Filer~~filer ☒☐
Non-accelerated ~~Filer~~filer ☐☒		Smaller ~~Reporting Company~~reporting company ☒
Emerging ~~Growth Company~~growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.50 par value, ~~4,923,879~~4,943,540 shares as of ~~October~~April 30, ~~2019.~~

2020.

Table of Contents

IND~~INDEX~~EX

EVANS BANCORP, INC. AND SUBSIDIARIES



PART 1. FINANCIAL INFORMATION		PAGE

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets – ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	1

	Unaudited Consolidated Statements of Income – Three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	2

	~~Unaudited Consolidated Statements of Income – Nine months ended September 30, 2019 and 2018~~	3

	Unaudited Consolidated Statements of Comprehensive Income – Three months ended ~~September 30,~~March 31, 2020 and 2019	3

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2020 and ~~2018~~2019	4

	Unaudited Consolidated Statements of ~~Comprehensive Income – Nine months ended September 30, 2019 and 2018~~	4
	~~Unaudited Consolidated Statements of Changes in Stockholders’ Equity –~~Cash Flows - Three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	5
	~~Unaudited Consolidated Statements of Changes in Stockholders’ Equity – Nine months ended September 30, 2019 and 2018~~	6

	~~Unaudited Consolidated Statements of Cash Flows - Nine months ended September 30, 2019 and 2018~~	7

	Notes to Unaudited Consolidated Financial Statements	97

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3831

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4740

Item 4.	Controls and Procedures	4841

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4942

Item 1A.	Risk Factors	4942

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4943

Item 3.	Defaults Upon Senior Securities	4943

Item 4.	Mine Safety Disclosure	4943

Item 5.	Other Information	4943

Item 6.	Exhibits	5043

	Signatures	51 45

Table of Contents


PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2019 AND DECEMBER 31, 2018
March 31, 2020 AND DECEMBER 31, 2019
(in thousands, except share and per share amounts)
	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
ASSETS
Cash and due from banks	$	19,587	$	13,997	$	11,262	$	10,577
Interest-bearing deposits at banks		14,757		25,918		40,706		28,280
Securities:
Available for sale, at fair value (amortized cost: $133,176 at September 30, 2019;		134,457		132,104
$135,274 at December 31, 2018)
Held to maturity, at amortized cost (fair value: $2,542 at September 30, 2019;		2,520		1,685
$1,674 at December 31, 2018)
Available for sale, at fair value (amortized cost: $156,011 at March 31, 2020;						159,191		127,922
$127,217 at December 31, 2019)
Held to maturity, at amortized cost (fair value: $2,963 at March 31, 2020;						2,847		2,386
$2,392 at December 31, 2019)
Federal Home Loan Bank common stock, at cost		1,588		1,474		1,588		1,588
Federal Reserve Bank common stock, at cost		1,950		1,929		1,961		1,956
Loans, net of allowance for loan losses of $15,382 at September 30, 2019
and $14,784 at December 31, 2018		1,204,410		1,141,146
Properties and equipment, net of accumulated depreciation of $20,364 at September 30, 2019
and $19,416 at December 31, 2018		13,946		10,485
Loans, net of allowance for loan losses of $18,157 at March 31, 2020
and $15,175 at December 31, 2019						1,228,049		1,211,356
Properties and equipment, net of accumulated depreciation of $20,998 at March 31, 2020
and $20,682 at December 31, 2019						13,951		13,754
Goodwill and intangible assets		12,657		12,992		13,421		12,545
Bank-owned life insurance		29,254		28,403		29,578		29,418
Operating lease right-of-use asset (see Note 1)		3,862		-
Operating lease right-of-use asset						3,577		3,720
Other assets		16,744		18,074		18,680		16,728

TOTAL ASSETS	$	1,455,732	$	1,388,207	$	1,524,811	$	1,460,230

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand	$	271,633	$	231,902	$	273,623	$	263,717
NOW		141,384		110,450		159,223		140,654
Savings		568,156		571,479		625,773		587,142
Time		277,633		301,227		268,978		275,927
Total deposits		1,258,806		1,215,058		1,327,597		1,267,440

Securities sold under agreement to repurchase		7,418		3,142		2,572		2,425
Other borrowings		10,000		10,000		10,000		10,000
Operating lease liability (see Note 1)		4,302		-
Operating lease liability						4,002		4,154
Other liabilities		19,007		17,031		21,214		16,428
Junior subordinated debentures		11,330		11,330		11,330		11,330
Total liabilities		1,310,863		1,256,561		1,376,715		1,311,777

STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 10,000,000 shares authorized; 4,920,381
and 4,852,868 shares issued at September 30, 2019 and December 31, 2018,
respectively, and 4,920,196 and 4,852,868 outstanding at September 30, 2019
and December 31, 2018, respectively		2,462		2,429
Common stock, $.50 par value, 10,000,000 shares authorized; 4,942,802
and 4,929,593 shares issued at March 31, 2020 and December 31, 2019,
respectively, and 4,942,802 and 4,929,283 outstanding at March 31, 2020
and December 31, 2019, respectively						2,474		2,467
Capital surplus		62,736		61,225		63,679		63,302
Treasury stock, at cost, 185 and 0 shares at September 30, 2019 and
December 31, 2018, respectively		-		-
Treasury stock, at cost, 0 and 310 shares at March 31, 2020 and
December 31, 2019, respectively						-		-
Retained earnings		81,525		73,345		82,604		85,267
Accumulated other comprehensive loss, net of tax		(1,854)		(5,353)		(661)		(2,583)
Total stockholders' equity		144,869		131,646		148,096		148,453

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,455,732	$	1,388,207	$	1,524,811	$	1,460,230

See Notes to Unaudited Consolidated Financial Statements


EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(in thousands, except share and per share amounts)
	Three Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2020		2019
INTEREST INCOME
Loans	$	15,645	$	13,676	$	14,546	$	14,362
Interest-bearing deposits at banks		159		63		181		249
Securities:
Taxable		993		805		1,049		801
Non-taxable		48		146		47		130
Total interest income		16,845		14,690		15,823		15,542
INTEREST EXPENSE
Deposits		3,038		2,412		2,876		2,843
Other borrowings		45��		51		47		45
Junior subordinated debentures		141		141		124		146
Total interest expense		3,224		2,604		3,047		3,034
NET INTEREST INCOME		13,621		12,086		12,776		12,508
PROVISION FOR LOAN LOSSES		(431)		252		2,999		538
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		14,052		11,834		9,777		11,970
NON-INTEREST INCOME
Deposit service charges		687		571		628		533
Insurance service and fees		3,225		3,215		2,425		2,442
Loss on sale of securities		-		(98)
Gain on loans sold		43		6		51		26
Bank-owned life insurance		160		165		160		159
Loss on tax credit investment		-		(165)		(2,475)		-
Refundable state historic tax credit		-		150		1,857		-
Interchange fee income		438		413		382		421
Other		611		507		310		614
Total non-interest income		5,164		4,764		3,338		4,195
NON-INTEREST EXPENSE
Salaries and employee benefits		7,644		7,090		7,797		7,160
Occupancy		853		795		861		836
Advertising and public relations		231		258		269		167
Professional services		1,009		588		1,374		745
Technology and communications		1,057		874		1,096		893
Amortization of intangibles		112		112		130		112
FDIC insurance		-		295		179		207
Other		1,370		1,445		1,164		1,104
Total non-interest expense		12,276		11,457		12,870		11,224
INCOME BEFORE INCOME TAXES		6,940		5,141		245		4,941
INCOME TAX PROVISION		1,776		346		41		1,221
NET INCOME	$	5,164	$	4,795	$	204	$	3,720

Net income per common share-basic	$	1.05	$	0.99	$	0.04	$	0.77
Net income per common share-diluted	$	1.04	$	0.97	$	0.04	$	0.75
Weighted average number of common shares outstanding		4,918,740		4,824,318		4,936,947		4,855,815
Weighted average number of diluted shares outstanding		4,976,639		4,940,822		4,992,214		4,932,451

See Notes to Unaudited Consolidated Financial Statements

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands)

Three Months Ended September 30,

2019

2018

NET INCOME

$
5,164

$
4,795

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

Unrealized gain (loss) on available-for-sale securities

523

(738)
Defined benefit pension plans:

Amortization of prior service cost

6

7
Amortization of actuarial loss

62

33
Total

68

40
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

591

(698)
COMPREHENSIVE INCOME

$
5,755

$
4,097

See Notes to Unaudited Consolidated Financial Statements



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(in thousands, except share and per share amounts)
							Accumulated
							Other
	Common		Capital		Retained		Comprehensive
	Stock		Surplus		Earnings		Loss		Total
Balance, December 31, 2018	$	2,429	$	61,225	$	73,345	$	(5,353)	$	131,646
Net Income						3,720				3,720
Other comprehensive income								1,370		1,370
Cash dividends ($0.52 per common share)						(2,527)				(2,527)
Stock compensation expense				201						201
Reissued 500 restricted shares										-
Issued 4,934 restricted shares, net of forfeitures		2		(2)						-
Issued 2,514 shares in stock option exercises		1		24						25
Balance, March 31, 2019	$	2,432	$	61,448	$	74,538	$	(3,983)	$	134,435

Balance, December 31, 2019	$	2,467	$	63,302	$	85,267	$	(2,583)	$	148,453
Net Income						204				204
Other comprehensive income								1,922		1,922
Cash dividends ($0.58 per common share)						(2,867)				(2,867)
Stock compensation expense				257						257
Reissued 310 restricted shares										-
Issued 5,930 restricted shares, net of forfeitures		3		(3)						-
Issued 7,279 shares in stock option exercises		4		123						127
Balance, March 31, 2020	$	2,474	$	63,679	$	82,604	$	(661)	$	148,096

See Notes to Unaudited Consolidated Financial Statements

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(in thousands, except share and per share amounts)

Accumulated

Other

Common

Capital

Retained

Comprehensive

Stock

Surplus

Earnings

Loss

Total

Balance, June 30, 2018

$
2,413

$
60,220

$
66,325

$
(5,383)

$
123,575

Net Income

4,795

4,795

Other comprehensive income

(698)

(698)

Cash dividends ($0.46 per common share)

(2,218)

(2,218)

Stock compensation expense

198

198

Issued 8,196 shares in stock option exercises

4

4

8

Balance, September 30, 2018

$
2,417

$
60,422

$
68,902

$
(6,081)

$
125,660

Balance, June 30, 2019

$
2,460

$
62,353

$
78,919

$
(2,445)

$
141,287

Net Income

5,164

5,164

Other comprehensive income

591

591

Cash dividends ($0.52 per common share)

(2,558)

(2,558)

Stock compensation expense

243

243

Issued 4,703 shares in stock option exercises

2

140

142

Reissued 2,261 shares in stock option exercises

-

Balance, September 30, 2019

$
2,462

$
62,736

$
81,525

$
(1,854)

$
144,869

See Notes to Unaudited Consolidated Financial Statements



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(in thousands)
	Three Months Ended March 31,
		2020		2019
OPERATING ACTIVITIES:
Interest received	$	15,968	$	15,323
Fees received		4,113		4,424
Interest paid		(2,248)		(2,999)
Cash paid to employees and vendors		(11,362)		(12,685)
Income taxes paid		(103)		-
Proceeds from sale of loans held for sale		3,739		2,071
Originations of loans held for sale		(3,335)		(2,045)

Net cash provided by operating activities		6,772		4,089

INVESTING ACTIVITIES:
Available for sales securities:
Purchases		(46,322)		(10,568)
Proceeds from sales, maturities, calls, and payments		17,430		5,523
Held to maturity securities:
Purchases		(511)		(224)
Proceeds from maturities, calls, and payments		50		10
Cash paid for bank-owned life insurance		-		(360)
Additions to properties and equipment		(491)		(426)
Purchase of tax credit investment		(3,116)		(19)
Insurance agency acquisition		(683)		-
Net increase in loans		(20,449)		(29,454)

Net cash used in investing activities		(54,092)		(35,518)

FINANCING ACTIVITIES:
Proceeds (repayments) from short-term borrowings, net		147		(660)
Net increase in deposits		60,157		60,665
Issuance of common stock		127		25

Net cash provided by financing activities		60,431		60,030

Net increase in cash and cash equivalents		13,111		28,601

CASH AND CASH EQUIVALENTS:
Beginning of period		38,857		39,915
End of period	$	51,968	$	68,516

See Notes to Unaudited Consolidated Financial Statements

EVANS BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(in thousands, except share and per share amounts)

Accumulated

Other

Common

Capital

Retained

Comprehensive

Stock

Surplus

Earnings

Loss

Total
Balance, December 31, 2017

$
2,394

$
59,444

$
59,921

$
(3,417)

$
118,342
Cumulative-effect adjustment due to change in accounting principle

1,496

1,496
Net Income

11,905

11,905
Other comprehensive income

(2,664)

(2,664)
Cash dividends ($0.92 per common share)

(4,420)

(4,420)
Stock compensation expense

597

597
Reissued 1,057 restricted shares

-
Issued 14,940 restricted shares, net of forfeitures

8

(8)

-
Issued 3,205 shares under Dividend Reinvestment Plan

2

142

144
Issued 3,898 shares in Employee Stock Purchase Plan

2

151

153
Issued 22,096 shares in stock option exercises

11

96

107
Balance, September 30, 2018

$
2,417

$
60,422

$
68,902

$
(6,081)

$
125,660

Balance, December 31, 2018

$
2,429

$
61,225

$
73,345

$
(5,353)

$
131,646
Net Income

13,266

13,266
Other comprehensive income

3,499

3,499
Cash dividends ($1.04 per common share)

(5,086)

(5,086)
Stock compensation expense

692

692
Reissued 500 restricted shares

-
Issued 20,757 restricted shares, net of forfeitures

12

(12)

-
Issued 3,866 shares under Dividend Reinvestment Plan

2

137

139
Issued 6,183 shares in Employee Stock Purchase Plan

3

195

198
Issued 32,516 shares in stock option exercises

16

499

515
Reissued 3,506 shares in stock option exercises

-
Balance, September 30, 2019

$
2,462

$
62,736

$
81,525

$
(1,854)

$
144,869

See Notes to Unaudited Consolidated Financial Statements



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(in thousands)
	Three Months Ended March 31,
		2020		2019

RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:

Net income	$	204	$	3,720

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		538		505
Deferred tax (benefit) expense		(1,001)		12
Provision for loan losses		2,999		538
Loss on tax credit investment		2,475		148
Changes in refundable state historic tax credit		(1,857)		17
Gain on loans sold		(51)		(26)
Stock compensation expense		257		201
Proceeds from sale of loans held for sale		3,739		2,071
Originations of loans held for sale		(3,335)		(2,045)
Changes in assets and liabilities affecting cash flow:
Other assets		(225)		(4,528)
Other liabilities		3,029		3,476

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	6,772	$	4,089

See Notes to Unaudited Consolidated Financial Statements

EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands)

Nine Months Ended September 30,

2019

2018
OPERATING ACTIVITIES:

Interest received

$
48,957

$
42,157
Fees received

13,404

10,897
Interest paid

(9,226)

(6,221)
Cash paid to employees and vendors

(36,888)

(30,188)
Income taxes (paid) refund

(1,586)

475
Proceeds from sale of loans held for resale

7,698

409
Originations of loans held for resale

(7,733)

(1,686)

Net cash provided by operating activities

14,626

15,843

INVESTING ACTIVITIES:

Available for sales securities:

Purchases

(46,893)

(47,863)
Proceeds from sales, maturities, calls, and payments

48,694

54,476
Held to maturity securities:

Purchases

(1,141)

(156)
Proceeds from maturities, calls, and payments

307

4,120
Cash paid for bank-owned life insurance

(360)

-
Proceeds from bank-owned life insurance claims

-

675
Additions to properties and equipment

(4,513)

(757)
Proceeds from sales of assets

185

Proceeds from equity securities sales

-

1,960
Purchase of tax credit investment

-

(3,877)
  Insurance agency acquisitions

-

(5,000)
Net increase in loans

(62,823)

(90,665)

Net cash used in investing activities

(66,544)

(87,087)

FINANCING ACTIVITIES:

Proceeds (repayments) from short-term borrowings, net

4,275

(84,560)
Net increase in deposits

43,748

164,394
Dividends paid

(2,528)

(2,202)
Issuance of common stock

852

404

Net cash provided by financing activities

46,347

78,036

Net increase (decrease) in cash and cash equivalents

(5,571)

6,792

CASH AND CASH EQUIVALENTS:

Beginning of period

39,915

21,330
End of period

$
34,344

$
28,122

See Notes to Unaudited Consolidated Financial Statements

THREE MONTHS ENDED MARCH 31, 2020 AND ~~NINE MONTH PERIODS ENDED SEPTEMBER 30,~~ 2019 ~~AND 2018~~

The accounting and reporting policies followed by Evans Bancorp, Inc. (the “Company”), a financial holding company, and its two direct, wholly-owned subsidiaries: (i) Evans Bank, National Association (the “Bank”), and the Bank’s subsidiaries, Evans National Leasing, Inc. (“ENL”), and Evans National Holding Corp. (“ENHC”); and (ii) Evans National Financial Services, LLC (“ENFS”), and ENFS’s subsidiary, The Evans Agency, LLC (“TEA”), and TEA’s subsidiaries, Frontier Claims Services, Inc. (“FCS”) and ENB Associates Inc. (“ENBA”), in the preparation of the accompanying interim unaudited consolidated financial statements conform with U.S. generally accepted accounting principles (“GAAP”) and with general practice within the industries in which it operates. Except as the context otherwise requires, the Company and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.”

The results of operations for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 (“10-K”). The Company’s significant accounting policies are disclosed in Note 1 to the 10-K.

~~The~~ Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs when they are issued by FASB. ASUs ~~listed below were~~ adopted by the Company during ~~its~~the current fiscal ~~year. ASUs~~year are not ~~listed below did not~~expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

~~On January~~The accompanying unaudited consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“10-K”). The Company’s significant accounting policies are disclosed in Note 1 to the 10-K.

The results of operations for the three month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

The Company’s first quarter 2020 results were impacted by the Coronavirus Disease 2019 ("COVID-19") pandemic, as the United States operates under a state of emergency and New York State has issued orders that, subject to limited exceptions, all individuals stay at home and non‑essential businesses cease all activities. The Company has remained open despite these orders because banks have been identified as providing essential services. The Company has been serving its customers through a variety of channels, including drive-up windows, limited appointment hours for personal meetings at certain branches, mobile banking, on-line banking, remote deposit capture and call centers. During the first quarter of 2020, the Company ~~adopted ASU 2016-02~~began processing ~~Leases~~payment deferrals for up to three months for both consumers and ~~all subsequent amendments (collectively, “ASU 2016-02”).~~business borrowers, and temporarily waiving certain service fees to assist customers who are experiencing financial hardship. The ~~objective~~Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of ~~this ASU is to~~0.0 - 0.25 percent. Economic trends and conditions reflecting the impact of COVID-19 have resulted in an increase ~~transparency and comparability among organizations by recognizing lease assets and lease liabilities~~in estimate of expected credit losses in the Company’s loan portfolio as the Company believes that COVID-19 could have a material effect on ~~the balance sheet and disclosing key information about leasing arrangements~~customers’ ability to meet that objective. The main difference between previous GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Under this new guidance, a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. their borrowing obligations.

ASU 2016-02 required a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. The Company elected to use the effective date, January 1, 2019, as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.

Under ASU 2016-02, leases are classified as finance or operating, with the classification affecting the pattern and classification of expense recognition in the income statement. The Company’s leases, consisting of property leases for certain of our bank branches and insurance agency offices, are classified as operating leases. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As these leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

ASU 2016-02 had an impact on the Company’s consolidated balance sheets, but did not have an impact on the consolidated statements of income or the consolidated statements of cash flows. The most significant impacts upon adoption on January 1, 2019 were the recognition of $4.3 million of ROU assets and $4.7 million of lease liabilities, including $0.4 million of liabilities that were reported in other liabilities in the Company’s December 31, 2018 consolidated balance sheet. ROU assets and lease liability were $3.9 million and $4.3 million, respectively, at September 30, 2019. Operating lease expenses during the three and nine month periods ended September 30, 2019 were $178 thousand and $535 thousand, respectively, and are included in other non-interest expense on the consolidated statement of income. Cash paid for amounts included in the measurement of lease liabilities during the three and nine month periods ended September 30, 2019 were $185 thousand and $553 thousand, respectively, and are included in cash flows from operating activities on the consolidated statement of cash flows. The weighted average discount rate related to the Company’s leases was 3.5% as of September 30, 2019. The weighted average remaining lease term related to the Company’s leases was 8.7 years as of September 30, 2019. Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:

The amortized cost of securities and their approximate fair value at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were as follows:



	September 30, 2019								March 31, 2020
	(in thousands)								(in thousands)

	Amortized		Unrealized				Fair		Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. government agencies	$	28,958	$	361	$	(14)	$	29,305	$	34,137	$	769	$	-	$	34,906
States and political subdivisions		3,723		70		(7)		3,786		3,286		57		(6)		3,337
Total debt securities	$	32,681	$	431	$	(21)	$	33,091	$	37,423	$	826	$	(6)	$	38,243

Mortgage-backed securities:
FNMA	$	35,678	$	455	$	(66)	$	36,067	$	41,012	$	1,338	$	(20)	$	42,330
FHLMC		16,506		122		(21)		16,607		14,441		497		-		14,938
GNMA		3,518		17		(13)		3,522		3,180		66		(1)		3,245
SBA		14,447		231		(43)		14,635		22,398		171		(229)		22,340
CMO		30,346		316		(127)		30,535		37,557		624		(86)		38,095
Total mortgage-backed securities	$	100,495	$	1,141	$	(270)	$	101,366	$	118,588	$	2,696	$	(336)	$	120,948

Total securities designated as available for sale	$	133,176	$	1,572	$	(291)	$	134,457	$	156,011	$	3,522	$	(342)	$	159,191

Held to Maturity:
Debt securities
States and political subdivisions	$	2,520	$	30	$	(8)	$	2,542	$	2,847	$	116	$	-	$	2,963

Total securities designated as held to maturity	$	2,520	$	30	$	(8)	$	2,542	$	2,847	$	116	$	-	$	2,963



	December 31, 2018								December 31, 2019
	(in thousands)								(in thousands)

	Amortized		Unrealized				Fair		Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value

Available for Sale:
Debt securities:
U.S. government agencies	$	34,597	$	2	$	(671)	$	33,928	$	27,951	$	225	$	(21)	$	28,155
States and political subdivisions		22,168		69		(64)		22,173		3,289		69		(7)		3,351
Total debt securities	$	56,765	$	71	$	(735)	$	56,101	$	31,240	$	294	$	(28)	$	31,506

Mortgage-backed securities:
FNMA	$	27,747	$	21	$	(729)	$	27,039	$	34,395	$	330	$	(53)	$	34,672
FHLMC		14,645		11		(431)		14,225		15,390		137		(13)		15,514
GNMA		1,660		6		(36)		1,630		3,421		16		(24)		3,413
SBA		9,432		-		(299)		9,133		13,752		90		(70)		13,772
CMO		25,025		6		(1,055)		23,976		29,019		190		(164)		29,045
Total mortgage-backed securities	$	78,509	$	44	$	(2,550)	$	76,003	$	95,977	$	763	$	(324)	$	96,416

Total securities designated as available for sale	$	135,274	$	115	$	(3,285)	$	132,104	$	127,217	$	1,057	$	(352)	$	127,922

Held to Maturity:
Debt securities
States and political subdivisions	$	1,685	$	11	$	(22)	$	1,674	$	2,386	$	24	$	(18)	$	2,392

Total securities designated as held to maturity	$	1,685	$	11	$	(22)	$	1,674	$	2,386	$	24	$	(18)	$	2,392

Available for sale securities with a total fair value of ~~$91~~$121 million and ~~$94~~$102 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

The scheduled maturities of debt and mortgage-backed securities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are summarized below. All maturity amounts are contractual maturities. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call premiums.




	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	cost		fair value		cost		fair value		cost		fair value		cost		fair value
		(in thousands)				(in thousands)				(in thousands)				(in thousands)

Debt securities available for sale:

Due in one year or less	$	4,000	$	3,986	$	5,074	$	5,075	$	6,004	$	6,045	$	6,005	$	6,014
Due after one year through five years		6,534		6,566		22,637		22,448		4,636		4,770		6,481		6,626
Due after five years through ten years		22,147		22,539		28,870		28,391		23,283		23,907		18,754		18,866
Due after ten years		-		-		184		187		3,500		3,521		-		-
		32,681		33,091		56,765		56,101		37,423		38,243		31,240		31,506

Mortgage-backed securities
available for sale		100,495		101,366		78,509		76,003		118,588		120,948		95,977		96,416

Total	$	133,176	$	134,457	$	135,274	$	132,104	$	156,011	$	159,191	$	127,217	$	127,922

Debt securities held to maturity:

Due in one year or less	$	1,124	$	1,125	$	693	$	693	$	1,650	$	1,664	$	1,139	$	1,140
Due after one year through five years		861		885		811		811		662		706		712		732
Due after five years through ten years		54		54		93		89		54		58		54		54
Due after ten years		481		478		88		81		481		535		481		466
Total	$	2,520	$	2,542	$	1,685	$	1,674	$	2,847	$	2,963	$	2,386	$	2,392

Contractual maturities of the Company’s mortgage-backed securities generally exceed ten years; however, the effective lives may be significantly shorter due to prepayments of the underlying loans and due to the nature of these securities.

Information regarding unrealized losses within the Company’s available for sale ~~and held to maturity~~ securities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 is summarized below. The securities are primarily U.S. government-guaranteed agency securities or municipal securities.



	September 30, 2019												March 31, 2020

		Less than 12 months				12 months or longer				Total				Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
		(in thousands)												(in thousands)
Available for Sale:
Debt securities:
U.S. government agencies	$	-	$	-	$	3,986	$	(14)	$	3,986	$	(14)	$	-	$	-	$	-	$	-	$	-	$	-
States and political subdivisions		-		-		181		(7)		181		(7)		-		-		181		(6)		181		(6)
Total debt securities	$	-	$	-	$	4,167	$	(21)	$	4,167	$	(21)	$	-	$	-	$	181	$	(6)	$	181	$	(6)

Mortgage-backed securities:
FNMA	$	3,386	$	(21)	$	6,181	$	(45)	$	9,567	$	(66)	$	1,422	$	(19)	$	13	$	(1)	$	1,435	$	(20)
FHLMC		3,046		(7)		1,300		(14)		4,346		(21)		-		-		-		-		-		-
GNMA		2,030		(10)		776		(3)		2,806		(13)		85		(1)		-		-		85		(1)
SBA		3,519		(43)		-		-		3,519		(43)		11,962		(229)		-		-		11,962		(229)
CMO		1,722		(13)		9,494		(114)		11,216		(127)		7,560		(84)		1,015		(2)		8,575		(86)
Total mortgage-backed securities	$	13,703	$	(94)	$	17,751	$	(176)	$	31,454	$	(270)	$	21,029	$	(333)	$	1,028	$	(3)	$	22,057	$	(336)

Held to Maturity:
Debt securities:
States and political subdivisions	$	496	$	(7)	$	423	$	(1)	$	919	$	(8)	$	-	$	-	$	-	$	-	$	-	$	-

Total temporarily impaired
securities	$	14,199	$	(101)	$	22,341	$	(198)	$	36,540	$	(299)	$	21,029	$	(333)	$	1,209	$	(9)	$	22,238	$	(342)


	December 31, 2018												December 31, 2019

		Less than 12 months				12 months or longer				Total				Less than 12 months				12 months or longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
		(in thousands)												(in thousands)
Available for Sale:
Debt securities:
U.S. government agencies	$	9,931	$	(49)	$	21,144	$	(622)	$	31,075	$	(671)	$	1,976	$	(18)	$	3,997	$	(3)	$	5,973	$	(21)
States and political subdivisions		5,218		(15)		6,893		(49)		12,111		(64)		-		-		181		(7)		181		(7)
Total debt securities	$	15,149	$	(64)	$	28,037	$	(671)	$	43,186	$	(735)	$	1,976	$	(18)	$	4,178	$	(10)	$	6,154	$	(28)

Mortgage-backed securities:
FNMA	$	2,637	$	(21)	$	23,667	$	(708)	$	26,304	$	(729)	$	5,355	$	(38)	$	3,630	$	(15)	$	8,985	$	(53)
FHLMC		1,895		(25)		11,899		(406)		13,794		(431)		-		-		1,242		(13)		1,242		(13)
GNMA		-		-		926		(36)		926		(36)		2,091		(22)		770		(2)		2,861		(24)
SBA		-		-		9,133		(299)		9,133		(299)		5,171		(70)		-		-		5,171		(70)
CMO		-		-		23,127		(1,055)		23,127		(1,055)		5,706		(36)		8,911		(128)		14,617		(164)
Total mortgage-backed securities	$	4,532	$	(46)	$	68,752	$	(2,504)	$	73,284	$	(2,550)	$	18,323	$	(166)	$	14,553	$	(158)	$	32,876	$	(324)

Held to Maturity:
Debt securities:
States and political subdivisions	$	156	$	-	$	722	$	(22)	$	878	$	(22)	$	227	$	(1)	$	2,165	$	(17)	$	2,392	$	(18)

Total temporarily impaired
securities	$	19,837	$	(110)	$	97,511	$	(3,197)	$	117,348	$	(3,307)	$	20,526	$	(185)	$	20,896	$	(185)	$	41,422	$	(370)

Management has assessed the securities available for sale in an unrealized loss position at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 and determined the decline in fair value below amortized cost to be temporary. In making this determination, management considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, and the financial condition of the issuer (primarily government or government-sponsored enterprises). In addition, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost. Management believes the decline in fair value is primarily related to market interest rate fluctuations and not to the credit deterioration of the individual issuers.

The Company has not recorded any other-than-temporary impairment (“OTTI”) charges as of ~~September 30, 2019~~March 31, 2020 and did not record any OTTI charges during ~~2018.~~2019. The credit worthiness of the Company’s securities portfolio is largely reliant on the ability of U.S. government sponsored agencies such as Federal Home Loan Bank (“FHLB”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), and municipalities throughout New York State to meet their obligations. In addition, dysfunctional markets could materially alter the liquidity, interest rate, and pricing risk of the portfolio. The stable past performance is not a guarantee for similar performance of the Company’s securities portfolio in future periods.

Fair value is defined in ASC Topic 820 “Fair Value Measurement” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The following table presents, for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a recurring basis as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively:


(in thousands)		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value

September 30, 2019
March 31, 2020
Securities available-for-sale:
US government agencies	$	-	$	29,305	$	-	$	29,305	$	-	$	34,906	$	-	$	34,906
States and political subdivisions		-		3,786		-		3,786		-		3,337		-		3,337
Mortgage-backed securities		-		101,366		-		101,366		-		120,948		-		120,948
Mortgage servicing rights		-		-		527		527		-		-		485		485

December 31, 2018
December 31, 2019
Securities available-for-sale:
US government agencies	$	-	$	33,928	$	-	$	33,928	$	-	$	28,155	$	-	$	28,155
States and political subdivisions		-		22,173		-		22,173		-		3,351		-		3,351
Mortgage-backed securities		-		76,003		-		76,003		-		96,416		-		96,416
Mortgage servicing rights		-		-		609		609		-		-		555		555

Fair values for securities are determined using independent pricing services and market-participating brokers. The Company’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. In addition, model processes, such as the Option Adjusted Spread model, are used to assess interest rate impact and develop prepayment scenarios. The models and the process take into account market convention. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company’s service provider may occasionally determine that it does not have sufficient verifiable information to value a particular security. In these cases the Company will utilize valuations from another pricing service.

Management believes that it has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control. On a quarterly basis, the Company reviews changes in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. Additionally, on an annual basis, the Company has its entire security portfolio priced by a second pricing service to determine consistency with another market evaluator. If, during the Company’s review or when comparing with another servicer, a material difference between pricing evaluations were to exist, the Company would submit an inquiry to the service provider regarding the data used to value a particular security. If the Company determines it has market information that would support a different valuation than the initial evaluation it can submit a challenge for a change to that security’s valuation.

Securities available for sale are classified as Level 2 in the fair value hierarchy as the valuation provided by the third-party provider uses observable market data.

Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices. Accordingly, the Company obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment predictions and other economic factors which management considers to be significant unobservable inputs. The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of MSRs to enable management to maintain an appropriate system of internal control. MSRs are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.


	Three months ended September 30,				Three months ended March 31,
(in thousands)	2019		2018		2020		2019
Mortgage servicing rights - July 1	$	570	$	635
Mortgage servicing rights - January 1					$	555	$	609
Gains/(Losses) included in earnings		(71)		3		(103)		(40)
Additions from loan sales		28		4		33		18
Mortgage servicing rights - September 30	$	527	$	642
Mortgage servicing rights - March 31					$	485	$	587

Quantitative information about the significant unobservable inputs used in the fair value measurement of MSRs at the respective dates is as follows:


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Servicing fees	0.25	%	0.25	%	0.25	%	0.25	%
Discount rate	9.00	%	9.00	%	9.00	%	9.00	%
Prepayment rate (CPR)	8.62	%	6.52	%	8.75	%	8.21	%

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The following table presents for each of the fair-value hierarchy levels as defined in this footnote, those financial instruments which are measured at fair value on a nonrecurring basis at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:



(in thousands)		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value

September 30, 2019
March 31, 2020
Collateral dependent impaired loans	$	-	$	-	$	15,500	$	15,500	$	-	$	-	$	17,263	$	17,263

December 31, 2018
December 31, 2019
Collateral dependent impaired loans	$	-	$	-	$	20,590	$	20,590	$	-	$	-	$	15,735	$	15,735

The Company evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

The Company has an appraisal policy in which appraisals are obtained upon a commercial loan being downgraded on the Company’s internal loan rating scale to a special mention or a substandard depending on the amount of the loan, the type of loan and the type of collateral. All impaired commercial loans are graded substandard or worse on the internal loan rating scale. For consumer loans, the Company obtains appraisals when a loan becomes 90 days past due or is determined to be impaired, whichever occurs first. Subsequent to the downgrade or reaching 90 days past due, if the loan remains outstanding and impaired for at least one year more, management may require another follow-up appraisal. Between receipts of updated appraisals, if necessary, management may perform an internal valuation based on any known changing conditions in the marketplace such as sales of similar properties, a change in the condition of the collateral, or feedback from local appraisers. Collateral dependent impaired loans had a gross value of ~~$16.0~~$18.2 million, with an allowance for loan loss of ~~$0.5~~$0.9 million, at ~~September 30, 2019~~March 31, 2020 compared with ~~$21.7~~$16.0 million and ~~$1.1~~$0.3 million, respectively, at December 31, ~~2018.~~2019.

The table below depicts the estimated fair values of the Company’s financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value		Amount		Value
		(in thousands)				(in thousands)				(in thousands)				(in thousands)
Financial assets:
Level 1:
Cash and cash equivalents	$	34,344	$	34,344	$	39,915	$	39,915	$	51,968	$	51,968	$	38,857	$	38,857
Level 2:
Available for sale securities		134,457		134,457		132,104		132,104		159,191		159,191		127,922		127,922
FHLB and FRB stock		3,538		3,538		3,403		3,403		3,549		N/A		3,544		N/A
Level 3:
Held to maturity securities		2,520		2,542		1,685		1,674		2,847		2,963		2,386		2,392
Loans, net		1,204,410		1,214,285		1,141,146		1,131,891		1,228,049		1,258,020		1,211,356		1,222,386
Mortgage servicing rights		527		527		609		609		485		485		555		555

Financial liabilities:
Level 1:
Demand deposits	$	271,633	$	271,633	$	231,902	$	231,902	$	273,623	$	273,623	$	263,717	$	263,717
NOW deposits		141,384		141,384		110,450		110,450		159,223		159,223		140,654		140,654
Savings deposits		568,156		568,156		571,479		571,479		625,773		625,773		587,142		587,142
Level 2:
Securities sold under agreement to
repurchase		7,418		7,418		3,142		3,142		2,572		2,572		2,425		2,425
Other borrowed funds		10,000		9,981		10,000		9,854		10,000		10,002		10,000		9,997
Junior subordinated debentures		11,330		11,330		11,330		11,330		11,330		11,330		11,330		11,330
Level 3:
Time deposits		277,633		278,276		301,227		298,999		268,978		271,259		275,927		277,051

The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated:


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Mortgage loans on real estate:	(in thousands)				(in thousands)
Residential mortgages	$	160,112	$	158,404	$	156,125	$	158,572
Commercial and multi-family		632,786		592,507		666,651		645,036
Construction-Residential		890		113		298		1,067
Construction-Commercial		90,825		105,196		96,698		97,848
Home equities		69,771		70,546		67,629		69,351
Total real estate loans		954,384		926,766		987,401		971,874

Commercial and industrial loans		262,144		226,057		256,157		251,197
Consumer and other loans		1,684		1,520		1,223		1,926
Net deferred loan origination costs		1,580		1,587		1,425		1,534
Total gross loans		1,219,792		1,155,930		1,246,206		1,226,531

Allowance for loan losses		(15,382)		(14,784)		(18,157)		(15,175)

Loans, net	$	1,204,410	$	1,141,146	$	1,228,049	$	1,211,356

The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month ~~and nine month~~ periods ended ~~September 30,~~March 31, 2020 and March 31, 2019, the Bank sold mortgages to FNMA totaling ~~$3.0~~$3.7 million, and ~~$7.6~~$2.0 million, ~~respectively, compared with $0.4 million mortgages sold during~~respectively. At March 31, 2020 and December 31, 2019, the ~~three and nine month periods ended September 30, 2018., The~~ Bank had a loan servicing portfolio principal balance of ~~$74~~$78 million and ~~$73~~$76 million, ~~at September 30, 2019 and December 31, 2018,~~ respectively, upon which it earned servicing fees. The value of the mortgage servicing rights for that portfolio was $0.5 million and $0.6 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. No loans were held for sale at March 31, 2020. At ~~September 30, 2019 and~~ December 31, ~~2018~~2019 there were ~~$0.5 million and $0.4~~$0.7 million in residential mortgages held for ~~sale, respectively.~~sale. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.

As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, ~~2018~~2019 are consistent with those utilized by the Company in the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2019.~~March 31, 2020.

The Bank monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The primary CQI for its commercial mortgage and commercial and industrial (“C&I”) portfolios is the individual loan’s credit risk rating. The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan losses:

The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process. Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information. Consumer loans also carry smaller balances. Given the lack of updated information after the initial underwriting of the loan and small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans. However, once a consumer loan is identified as impaired, it is individually evaluated for impairment.

The following tables provide data, at the class level, of credit quality indicators of certain loans for the dates specified:



September 30, 2019
March 31, 2020										March 31, 2020
(in thousands)	(in thousands)									(in thousands)
Corporate Credit Exposure – By Credit Rating		Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial			Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better		$	60,844	$	452,715	$	513,559	$	173,384		$	73,866	$	476,629	$	550,495	$	184,214
Watch			20,811		153,660		174,471		70,187			12,493		165,806		178,299		50,615
Special Mention			6,191		19,792		25,983		9,373			8,133		11,024		19,157		11,836
Substandard			2,979		6,619		9,598		9,200			2,206		13,192		15,398		9,492
Doubtful/Loss			-		-		-		-			-		-		-		-
Total		$	90,825	$	632,786	$	723,611	$	262,144		$	96,698	$	666,651	$	763,349	$	256,157




December 31, 2018
December 31, 2019										December 31, 2019
(in thousands)	(in thousands)									(in thousands)
Corporate Credit Exposure – By Credit Rating		Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial			Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better		$	65,932	$	466,294	$	532,226	$	155,687		$	73,646	$	451,297	$	524,943	$	165,255
Watch			30,628		109,409		140,037		57,366			13,380		171,277		184,657		68,665
Special Mention			-		10,583		10,583		4,105			8,359		15,725		24,084		7,631
Substandard			8,636		6,221		14,857		8,870			2,463		6,737		9,200		9,646
Doubtful/Loss			-		-		-		29			-		-		-		-
Total		$	105,196	$	592,507	$	697,703	$	226,057		$	97,848	$	645,036	$	742,884	$	251,197

The following tables provide an analysis of the age of the recorded investment in loans that are past due as of the dates indicated:



September 30, 2019
March 31, 2020													March 31, 2020
(in thousands)	(in thousands)												(in thousands)

		Current							Non-accruing		Total			Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance			Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	256,920	$	173	$	806	$	-	$	4,245	$	262,144	$	245,230	$	1,094	$	2,613	$	-	$	7,220	$	256,157
Residential real estate:
Residential		158,290		-		285		-		1,537		160,112		151,557		3,160		-		-		1,408		156,125
Construction		890		-		-		-		-		890		298		-		-		-		-		298
Commercial real estate:
Commercial		627,253		-		-		-		5,533		632,786		650,625		10,009		-		-		6,017		666,651
Construction		89,228		-		-		-		1,597		90,825		93,488		1,892		-		-		1,318		96,698
Home equities		68,499		345		-		-		927		69,771		66,552		302		24		-		751		67,629
Consumer and other		1,672		12		-		-		-		1,684		1,206		11		3		3		-		1,223
Total Loans	$	1,202,752	$	530	$	1,091	$	-	$	13,839	$	1,218,212	$	1,208,956	$	16,468	$	2,640	$	3	$	16,714	$	1,244,781

Note: Loan balances do not include $~~1.6~~1.4 million in net deferred loan origination costs as of ~~September~~ March30~~, 2019.~~31, 2020.



December 31, 2018
(in thousands)
													December 31, 2019
													(in thousands)

		Current							Non-accruing		Total				Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance				Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	217,625	$	6,173	$	565	$	-	$	1,694	$	226,057	Commercial and industrial	$	245,658	$	705	$	-	$	-	$	4,834	$	251,197
Residential real estate:													Residential real estate:
Residential		154,063		2,546		332		-		1,463		158,404	Residential		153,630		2,616		888		-		1,438		158,572
Construction		113		-		-		-		-		113	Construction		865		-		202		-		-		1,067
Commercial real estate:													Commercial real estate:
Commercial		582,016		4,546		-		-		5,945		592,507	Commercial		630,016		3,482		5,879		-		5,659		645,036
Construction		95,204		1,027		329		-		8,636		105,196	Construction		92,667		2,886		720		-		1,575		97,848
Home equities		69,094		123		76		-		1,253		70,546	Home equities		67,868		354		239		-		890		69,351
Consumer and other		1,514		5		1		-		-		1,520	Consumer and other		1,907		15		4		-		-		1,926
Total Loans	$	1,119,629	$	14,420	$	1,303	$	-	$	18,991	$	1,154,343	Total Loans	$	1,192,611	$	10,058	$	7,932	$	-	$	14,396	$	1,224,997

Note: Loan balances do not include $~~1.6~~1.5 million in net deferred loan origination costs as of December 31, ~~2018.~~2019.

The following tables present the activity in the allowance for loan losses according to portfolio segment for the ~~nine~~three month periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:




September 30, 2019
March 31, 2020													March 31, 2020

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total			Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,368	$	8,844	$	106	$	1,121	$	345	$	14,784		$	4,547	$	9,005	$	155	$	1,071	$	397	$	15,175
Charge-offs		(248)		(56)		(94)		-		-		(398)			(17)		-		(15)		(29)		(4)		(65)
Recoveries		786		-		13		-		-		799			32		-		16		-		-		48
Provision (Credit)		290		152		114		(325)		(34)		197			1,013		1,583		(65)		376		92		2,999
Ending balance	$	5,196	$	8,940	$	139	$	796	$	311	$	15,382		$	5,575	$	10,588	$	91	$	1,418	$	485	$	18,157

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	635	$	13	$	21	$	35	$	-	$	704		$	1,012	$	6	$	-	$	-	$	-	$	1,018
Collectively evaluated
for impairment		4,561		8,927		118		761		311		14,678			4,563		10,582		91		1,418		485		17,139
Total	$	5,196	$	8,940	$	139	$	796	$	311	$	15,382		$	5,575	$	10,588	$	91	$	1,418	$	485	$	18,157

Loans:
Ending balance:
Individually evaluated
for impairment	$	6,016	$	7,708	$	21	$	2,915	$	1,498	$	18,158		$	7,456	$	7,872	$	-	$	2,591	$	1,252	$	19,171
Collectively evaluated
for impairment		256,128		715,903		1,663		158,087		68,273		1,200,054			248,701		755,477		1,223		153,832		66,377		1,225,610
Total	$	262,144	$	723,611	$	1,684	$	161,002	$	69,771	$	1,218,212		$	256,157	$	763,349	$	1,223	$	156,423	$	67,629	$	1,244,781

Note: Loan balances do not include $~~1.6~~1.4 million in net deferred loan origination costs as of ~~September 30, 2019.~~March 31, 2020.




September 30, 2018
March 31, 2019													March 31, 2019

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total			Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	5,204	$	7,409	$	109	$	950	$	347	$	14,019		$	4,368	$	8,844	$	106	$	1,121	$	345	$	14,784
Charge-offs		(67)		(262)		(83)		(86)		(11)		(509)			(121)		-		(23)		-		-		(144)
Recoveries		18		-		6		-		1		25			22		-		7		-		-		29
Provision (Credit)		(574)		1,923		50		290		(11)		1,678			485		205		21		(168)		(5)		538
Ending balance	$	4,581	$	9,070	$	82	$	1,154	$	326	$	15,213		$	4,754	$	9,049	$	111	$	953	$	340	$	15,207

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	113	$	950	$	23	$	70	$	-	$	1,156		$	499	$	579	$	22	$	70	$	-	$	1,170
Collectively evaluated
for impairment		4,468		8,120		59		1,084		326		14,057			4,255		8,470		89		883		340		14,037
Total	$	4,581	$	9,070	$	82	$	1,154	$	326	$	15,213		$	4,754	$	9,049	$	111	$	953	$	340	$	15,207

Loans:
Ending balance:
Individually evaluated
for impairment	$	2,925	$	18,267	$	23	$	2,687	$	1,907	$	25,809		$	4,293	$	15,536	$	22	$	2,963	$	1,661	$	24,475
Collectively evaluated
for impairment		244,216		660,314		1,368		154,062		68,206		1,128,166			237,216		694,316		1,416		158,230		68,116		1,159,294
Total	$	247,141	$	678,581	$	1,391	$	156,749	$	70,113	$	1,153,975		$	241,509	$	709,852	$	1,438	$	161,193	$	69,777	$	1,183,769

Note: Loan balances do not include $~~1.6~~1.7 million in net deferred loan origination costs as of ~~September 30, 2018.~~March 31, 2019.

~~The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended September 30, 2019 and 2018:~~

The following tables provide data, at the class level, for impaired loans as of the dates indicated:



			At September 30, 2019													At March 31, 2020
			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:	With no related allowance recorded:		(in thousands)											With no related allowance recorded:		(in thousands)
Commercial and industrial		$	3,096	$	3,346	$	-	$	3,269	$	62	$	92		$	2,008	$	2,322	$	-	$	2,223	$	30	$	1
Residential real estate:
Residential			2,576		2,805		-		2,652		105		50			2,591		2,870		-		2,672		17		16
Construction			-		-		-		-		-		-			-		-		-		-		-		-
Commercial real estate:
Commercial			5,914		6,389		-		6,188		180		30			6,120		6,643		-		6,358		64		22
Construction			1,353		1,353		-		1,353		6		50			1,318		1,352		-		1,335		15		-
Home equities			1,498		1,699		-		1,563		49		25			1,252		1,463		-		1,301		12		6
Consumer and other			-		-		-		-		-		-			-		-		-		-		-		-
Total impaired loans		$	14,437	$	15,592	$	-	$	15,025	$	402	$	247		$	13,289	$	14,650	$	-	$	13,889	$	138	$	45


			At September 30, 2019													At March 31, 2020
			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:	With a related allowance recorded:		(in thousands)											With a related allowance recorded:		(in thousands)
Commercial and industrial		$	2,920	$	2,991	$	635	$	2,990	$	76	$	64		$	5,448	$	5,525	$	1,012	$	5,516	$	76	$	2
Residential real estate:
Residential			339		350		35		341		13		1			-		-		-		-		-		-
Construction			-		-		-		-		-		-			-		-		-		-		-		-
Commercial real estate:
Commercial			197		197		6		197		5		4			434		443		6		437		6		-
Construction			244		246		7		244		4		9			-		-		-		-		-		-
Home equities			-		-		-		-		-		-			-		-		-		-		-		-
Consumer and other			21		24		21		22		-		1			-		-		-		-		-		-
Total impaired loans		$	3,721	$	3,808	$	704	$	3,794	$	98	$	79		$	5,882	$	5,968	$	1,018	$	5,953	$	82	$	2


		At September 30, 2019												At March 31, 2020
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)												(in thousands)
Commercial and industrial	$	6,016	$	6,337	$	635	$	6,259	$	138	$	156	$	7,456	$	7,847	$	1,012	$	7,739	$	106	$	3
Residential real estate:
Residential		2,915		3,155		35		2,993		118		51		2,591		2,870		-		2,672		17		16
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial real estate:
Commercial		6,111		6,586		6		6,385		185		34		6,554		7,086		6		6,795		70		22
Construction		1,597		1,599		7		1,597		10		59		1,318		1,352		-		1,335		15		-
Home equities		1,498		1,699		-		1,563		49		25		1,252		1,463		-		1,301		12		6
Consumer and other		21		24		21		22		-		1		-		-		-		-		-		-
Total impaired loans	$	18,158	$	19,400	$	704	$	18,819	$	500	$	326	$	19,171	$	20,618	$	1,018	$	19,842	$	220	$	47



			At December 31, 2018													At December 31, 2019
			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:	With no related allowance recorded:		(in thousands)											With no related allowance recorded:		(in thousands)
Commercial and industrial		$	1,633	$	2,611	$	-	$	1,785	$	116	$	65		$	3,798	$	4,112	$	-	$	4,046	$	118	$	143
Residential real estate:
Residential			2,289		2,483		-		2,337		45		69			2,744		3,003		-		2,823		73		63
Construction			-		-		-		-		-		-			-		-		-		-		-		-
Commercial real estate:
Commercial			6,538		6,914		-		6,733		220		115			6,019		6,521		-		6,293		225		72
Construction			116		116		-		143		-		12			1,335		1,352		-		1,344		23		50
Home equities			1,887		2,058		-		1,952		71		43			1,453		1,687		-		1,525		64		30
Consumer and other			-		-		-		-		-		-			-		-		-		-		-		-
Total impaired loans		$	12,463	$	14,182	$	-	$	12,950	$	452	$	304		$	15,349	$	16,675	$	-	$	16,031	$	503	$	358


			At December 31, 2018													At December 31, 2019
			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized			Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:	With a related allowance recorded:		(in thousands)											With a related allowance recorded:		(in thousands)
Commercial and industrial		$	2,068	$	2,095	$	249	$	2,098	$	17	$	125		$	2,760	$	2,808	$	442	$	2,764	$	109	$	63
Residential real estate:
Residential			525		556		85		520		22		3			60		62		5		61		3		1
Construction			-		-		-		-		-		-			-		-		-		-		-		-
Commercial real estate:
Commercial			-		-		-		-		-		-			197		197		4		197		8		4
Construction			8,636		8,975		716		8,793		379		113			240		246		5		242		8		9
Home equities			-		-		-		-		-		-			-		-		-		-		-		-
Consumer and other			23		27		23		23		-		2			21		23		21		22		-		1
Total impaired loans		$	11,252	$	11,653	$	1,073	$	11,434	$	418	$	243		$	3,278	$	3,336	$	477	$	3,286	$	128	$	78


		At December 31, 2018												At December 31, 2019
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)												(in thousands)
Commercial and industrial	$	3,701	$	4,706	$	249	$	3,883	$	133	$	190	$	6,558	$	6,920	$	442	$	6,810	$	227	$	206
Residential real estate:
Residential		2,814		3,039		85		2,857		67		72		2,804		3,065		5		2,884		76		64
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial real estate:
Commercial		6,538		6,914		-		6,733		220		115		6,216		6,718		4		6,490		233		76
Construction		8,752		9,091		716		8,936		379		125		1,575		1,598		5		1,586		31		59
Home equities		1,887		2,058		-		1,952		71		43		1,453		1,687		-		1,525		64		30
Consumer and other		23		27		23		23		-		2		21		23		21		22		-		1
Total impaired loans	$	23,715	$	25,835	$	1,073	$	24,384	$	870	$	547	$	18,627	$	20,011	$	477	$	19,317	$	631	$	436

The following tables summarize the loans that were classified as troubled debt restructurings (“TDRs”) as of the dates indicated:



		September 30, 2019								March 31, 2020
		(in thousands)								(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,977	$	206	$	1,771	$	65	$	2,017	$	1,781	$	236	$	396
Residential real estate:
Residential		1,832		454		1,378		6		1,681		498		1,183		-
Construction		-		-		-		-		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,854		3,276		578		-		3,577		3,040		537		-
Construction		-		-		-		-		-		-		-		-
Home equities		696		125		571		-		671		170		501		-
Consumer and other		21		-		21		21		-		-		-		-
Total TDR loans	$	8,380	$	4,061	$	4,319	$	92	$	7,946	$	5,489	$	2,457	$	396



		December 31, 2018								December 31, 2019
		(in thousands)								(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	2,282	$	275	$	2,007	$	154	$	2,052	$	328	$	1,724	$	26
Residential real estate:
Residential		1,617		266		1,351		14		1,815		449		1,366		-
Construction		-		-		-		-		-		-		-		-
Commercial real estate:
Commercial and multi-family		4,164		3,571		593		-		3,632		3,075		557		-
Construction		8,753		8,637		116		716		-		-		-		-
Home equities		756		122		634		-		738		175		563		-
Consumer and other		23		-		23		23		21		-		21		21
Total TDR loans	$	17,595	$	12,871	$	4,724	$	907	$	8,258	$	4,027	$	4,231	$	47

Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty.

The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all TDR loans are considered impaired. As of ~~September 30, 2019,~~March 31, 2020, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.

The Company’s TDRs have various agreements that involve deferral of principal payments, or interest-only payments, for a period (usually 12 months or less) to allow the borrower time to improve cash flow or sell the property. Other common concessions leading to the designation of a TDR are lines of credit that are termed-out and/or extensions of maturities at rates that are less than the prevailing market rates given the risk profile of the borrower.

Federal banking regulators issued interagency statements that included guidance on accounting for loan modifications in light of the economic impact of the Coronavirus Disease 2019 (COVID-19) pandemic on March 22, 2020 and April 7, 2020. The guidance interprets

current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed, in working with the staff of the FASB, that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were less than 30 days past due on its contractual payments prior to any relief are not TDRs.

The following tables show the data for TDR activity by the type of concession granted to the borrower for the three ~~and nine~~ month periods ended ~~September 30~~March 31, ~~2019~~2020 and ~~2018:~~2019:

Nine months ended September 30, 2019

Nine months ended September 30, 2018

(Recorded Investment in thousands)

(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial and Industrial:

Extension of maturity

1

$
21

$
21

1

$
46

$
46
Term-out line of credit

1

42

42

1

29

29
Combination of concessions

-

-

-

1

63

63
Residential Real Estate & Construction:

Extension of maturity and

interest rate reduction

3

307

307

-

-

-
Commercial Real Estate & Construction:

Deferral of principal

-

-

-

1

8,768

8,768
Extension of maturity

-

-

-

1

181

181
Combination of concessions

-

-

-

1

154

154
Home Equities:

Deferral of principal

-

-

-

1

100

100
Extension of maturity and

interest rate reduction

3

390

390

-

-

-
Consumer and other loans

-

-

-

-

-

-

The general practice of the Bank is to work with borrowers so that they are able to repay their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off to its collateral value. A loan is considered in default when the loan is 90 days past due. Loans which were classified as TDRs during the previous 12 months which defaulted during the ~~nine~~three month periods ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were not material.

The common stock per share information is based upon the weighted average number of shares outstanding during each period. For the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2020 and 2019, the Company had an average of ~~57,899~~55,267 and ~~68,660~~76,636 dilutive shares outstanding, respectively. ~~The Company had an average of 116,504 and 125,801 dilutive shares outstanding for the three and nine month periods ended September 30, 2018.~~

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and not included in calculating diluted earnings per share. For the three ~~and nine~~ month ~~periods~~period ended ~~September 30,~~March 31, 2020 and 2019, there was an average of ~~82,642~~81,770 and ~~85,579~~46,220 potentially anti-dilutive shares outstanding, respectively, that were not included in calculating diluted earnings per share because their effect was anti-dilutive. ~~For the three and nine month periods ended September 30, 2018 there were no anti-dilutive shares outstanding.~~

The following tables summarize the changes in the components of accumulated other comprehensive income ~~(loss)~~ during the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2019 and 2018:~~2019:


	Balance at June 30, 2019		Net Change		Balance at September 30, 2019		Balance at December 31, 2019		Net Change		Balance at March 31, 2020
	(in thousands)						(in thousands)
Net unrealized gain on investment securities	$	426	$	523	$	949	$	522	$	1,835	$	2,357
Net defined benefit pension plan adjustments		(2,871)		68		(2,803)		(3,105)		87		(3,018)
Total	$	(2,445)	$	591	$	(1,854)	$	(2,583)	$	1,922	$	(661)

	Balance at June 30, 2018		Net Change		Balance at September 30, 2018		Balance at December 31, 2018		Net Change		Balance at March 31, 2019
	(in thousands)						(in thousands)
Net unrealized loss on investment securities	$	(3,093)	$	(738)	$	(3,831)
Net unrealized (loss) gain on investment securities							$	(2,348)	$	1,303	$	(1,045)
Net defined benefit pension plan adjustments		(2,290)		40		(2,250)		(3,005)		67		(2,938)
Total	$	(5,383)	$	(698)	$	(6,081)	$	(5,353)	$	1,370	$	(3,983)



	Three months ended September 30, 2019						Three months ended September 30, 2018						Three months ended March 31, 2020						Three months ended March 31, 2019
	(in thousands)						(in thousands)						(in thousands)						(in thousands)
	Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount		Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount		Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount		Before-Tax Amount		Income Tax (Provision) Benefit		Net-of-Tax Amount
Unrealized gain (loss) on investment
Unrealized gain on investment
securities:
Unrealized gain (loss) on investment
Unrealized gain on investment
securities	$	705	$	(182)	$	523	$	(1,002)	$	264	$	(738)	$	2,475	$	(640)	$	1,835	$	1,761	$	(458)	$	1,303

Defined benefit pension plan
adjustments:
Reclassifications from accumulated other
comprehensive income for gains
Amortization of prior service cost (a)	$	7	$	(1)	$	6	$	8	$	(1)	$	7	$	8	$	(3)	$	5	$	8	$	(2)	$	6
Amortization of actuarial loss (a)		82		(20)		62		43		(10)		33		113		(31)		82		83		(22)		61
Net change		89		(21)		68		51		(11)		40		121		(34)		87		91		(24)		67

Other comprehensive income (loss)	$	794	$	(203)	$	591	$	(951)	$	253	$	(698)
Other comprehensive income													$	2,596	$	(674)	$	1,922	$	1,852	$	(482)	$	1,370

Nine months ended September 30, 2019

Nine months ended September 30, 2018

(in thousands)

(in thousands)

Before-Tax Amount

Income Tax (Provision) Benefit

Net-of-Tax Amount

Before-Tax Amount
��
Income Tax (Provision) Benefit

Net-of-Tax Amount
Unrealized gain (loss) on investment

securities:

Unrealized gain (loss) on investment

securities

$
4,451

$
(1,154)

$
3,297

$
(3,761)

$
979

$
(2,782)

Defined benefit pension plan

adjustments:

Reclassifications from accumulated other

comprehensive income for gains

Amortization of prior service cost (a)

$
23

$
(6)

$
17

$
24

$
(6)

$
18
Amortization of actuarial loss (a)

248

(63)

185

127

(27)

100
Net change

271

(69)

202

151

(33)

118

Other comprehensive income (loss)

$
4,722

$
(1,223)

$
3,499

$
(3,610)

$
946

$
(2,664)

The Company comprises two primary business segments, banking and insurance agency activities. The following tables set forth information regarding these segments for the three ~~and nine~~ month periods ended ~~September 30~~March 31, ~~2019~~2020 and ~~2018.~~2019.




		Three months ended September 30, 2019						Three months ended March 31, 2020
			Banking		Insurance Agency				Banking		Insurance Agency
			Activities		Activities		Total		Activities		Activities		Total
			(in thousands)						(in thousands)
	��
Net interest income (expense)		$	13,652	$	(31)	$	13,621	$	12,779	$	(3)	$	12,776
(Credit) provision for loan losses			(431)		-		(431)
Provision for loan losses									2,999		-		2,999
Net interest income (expense) after
provision for loan losses			14,083		(31)		14,052		9,780		(3)		9,777
Non-interest income			1,777		162		1,939
Insurance service and fees			130		3,095		3,225		113		2,312		2,425
Other non-interest income									913		-		913
Amortization expense			-		112		112		-		130		130
Non-interest expense			9,778		2,386		12,164
Other non-interest expense									10,720		2,020		12,740
Income before income taxes			6,212		728		6,940		86		159		245
Income tax provision			1,587		189		1,776		-		41		41
Net income		$	4,625	$	539	$	5,164	$	86	$	118	$	204




	Three months ended September 30, 2018						Three months ended March 31, 2019
		Banking		Insurance Agency				Banking		Insurance Agency
		Activities		Activities		Total		Activities		Activities		Total
		(in thousands)						(in thousands)

Net interest income (expense)	$	12,118	$	(32)	$	12,086	$	12,541	$	(33)	$	12,508
Provision for loan losses		252		-		252		538		-		538
Net interest income (expense) after
provision for loan losses		11,866		(32)		11,834		12,003		(33)		11,970
Non-interest income		1,549		-		1,549
Insurance service and fees		148		3,067		3,215		119		2,323		2,442
Other non-interest income								1,753		-		1,753
Amortization expense		-		112		112		-		112		112
Non-interest expense		9,247		2,098		11,345
Other non-interest expense								9,086		2,026		11,112
Income before income taxes		4,316		825		5,141		4,789		152		4,941
Income tax provision		116		230		346		1,181		40		1,221
Net income	$	4,200	$	595	$	4,795	$	3,608	$	112	$	3,720

The unaudited consolidated financial statements do not reflect various commitments and contingent liabilities, which arise in the normal course of business, and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities consist of commitments to extend credit and standby letters of credit. A summary of the Bank’s commitments and contingent liabilities is as follows:



	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(in thousands)				(in thousands)

Commitments to extend credit	$	347,081	$	290,785	$	333,067	$	331,974
Standby letters of credit		4,432		3,379		3,775		4,309
Total	$	351,513	$	294,164	$	336,842	$	336,283

Commitments to extend credit and standby letters of credit include some exposure to credit loss in the event of nonperformance by the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Company’s unaudited consolidated balance sheets. Because these instruments have fixed maturity dates, and because they may expire without being drawn upon, they do not necessarily represent cash requirements of the Bank. The Bank did not incur any losses on its commitments and did not record a reserve for its commitments during the first ~~nine~~three months of ~~2019~~2020 or during ~~2018.~~2019.

Certain lending commitments for construction residential mortgage loans are considered derivative instruments under the guidelines of GAAP. The changes in the fair value of these commitments, due to interest rate risk, are not recorded on the consolidated balance sheets as the fair value of these derivatives is not considered to be material.

On January 31, 2008, the Bank froze its defined benefit pension plan. The plan covered substantially all Bank employees. The plan provides benefits that are based on the employees’ compensation and years of service. Under the freeze, eligible employees will receive, at retirement, the benefits already earned through January 31, 2008, but have not accrued any additional benefits since then. As a result, service cost is no longer incurred.

The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank used recognized the prior service cost and net gains or losses over the average remaining service period of active employees.

The Bank also maintains a nonqualified supplemental executive retirement plan covering certain members of the Company’s senior management. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual expense and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the net gains or losses over the average remaining service period of active employees.

The following table presents the net periodic cost for the Bank’s defined benefit pension plan and supplemental executive retirement plan for the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2019 and 2018:~~2019:




		Three months ended September 30,								Three months ended March 31,
		(in thousands)								(in thousands)

					Supplemental Executive								Supplemental Executive
	Pension Benefits				Retirement Plan				Pension Benefits				Retirement Plan

	2019		2018		2019		2018		2020		2019		2020		2019

Service cost	$	-	$	-	$	37	$	47	$	-	$	-	$	39	$	36
Interest cost		55		51		51		34		50		55		38		50
Expected return on plan assets		(70)		(78)		-		-		(81)		(69)		-		-
Amortization of prior service cost		-		-		7		8		-		-		8		8
Amortization of the net loss		24		21		58		22		25		24		88		59
Net periodic cost (benefit)	$	9	$	(6)	$	153	$	111	$	(6)	$	10	$	173	$	153

The components of net periodic benefit cost other than the service cost component are included in the line item “other expense” in the income statement.

A description of the Company’s material revenue streams in non-interest income accounted for under ASC 606 follows:

Insurance Service and Fees: Insurance services revenue relates to various revenue streams from services provided by TEA and the Bank:

TEA has agreements with various insurance companies to sell policies to customers on behalf of the carriers. The performance obligation for TEA is to sell annual P&C policies to commercial customers and consumers. This performance obligation is met when a new policy is sold or when an existing policy renews. The policies are generally one year terms. In the agreements with the respective insurance companies, a commission rate is agreed upon. The commission is recognized at the time of the sale of the policy or when a policy renews.

TEA has signed contracts with insurance carriers that enable TEA to sell benefit plans to commercial customers on behalf of the insurance carriers. The performance obligation for TEA is to sell the plans to commercial customers. After the initial sale when the customer signs an agreement to purchase the offered benefit plan, the performance obligation is met each month when a customer continues utilizing benefit plans from the carrier. The customer does not commit to a specific length of time with the carrier. In the agreements with the respective insurance companies, a commission rate is agreed upon. Revenue is recognized each month when the customer continues with the benefit plan sold by TEA.

TEA has signed written agreements with insurance carriers that document payouts to TEA based on the loss ratios of its customers. The performance obligation for TEA is to maintain a customer base with loss ratios below the agreed upon thresholds. In the contracts with the insurance companies, payout rates based on loss ratios are documented. The consideration is variable as loss ratios vary based on customer experience. TEA’s performance obligation is over the course of the year as its customers’ performance with insurance carriers is measured throughout the year as losses occur. Due to the variable nature of contingent profit sharing revenue, TEA will accrue contingent profit sharing revenue throughout the year based on recent historical results. As loss events occur and overall performance becomes known to TEA, accrual adjustments will be made until the cash is ultimately received.

The Company earns wealth management fees from its contracts with customers for certain financial services. Fees that are transaction-based are recognized at the point in time that the transaction is executed. Other related services provided include financial planning services and the fees the Bank earns are recognized when the services are rendered.

FCS has signed agreements with insurance companies to perform claims services including investigative and adjustment services related to residential and commercial lines. The performance obligation is for FCS to investigate the insurance claims and inspecting the damage to determine the extent of the insurance company’s liability. FCS is paid based on time and materials expended to investigate the claim. The rates paid are determined in the agreement between FCS and the respective insurance companies. Upon completion of its claims inspection work, FCS bills the insurance company for services rendered and recognizes the revenue earned.

A disaggregation of the total insurance service and other fees for the three months ended March 31, 2020 and ~~nine month periods ended September 30,~~ 2019 ~~and 2018~~ is provided in the tables below:



		Nine months ended September 30,				Three months ended March 31,
		2019		2018		2020		2019
	(in thousands)					(in thousands)
Commercial property and casualty insurance commissions	$	3,267	$	2,665	$	867	$	842
Personal property and casualty insurance commissions		2,618		2,249		754		750
Employee benefits sales commissions		869		664		379		293
Profit sharing and contingent revenue		939		790		206		257
Wealth management and other financial services		405		462		121		124
Insurance claims services revenue		397		234		55		146
Other insurance-related revenue		73		68		43		30
Total insurance service and other fees	$	8,568	$	7,132	$	2,425	$	2,442

~~Note 1 contains details~~ASUs adopted by the Company during the current fiscal year are not expected to have a material impact on the ~~impact~~Company’s consolidated financial position, results of ~~accounting pronouncements adopted during the nine months ended~~ ~~September 30, 2019~~.operations, cash flows or disclosures. The following standards will be adopted in future periods. ASUs not listed below are not expected to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. – Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the “probable” threshold. The main objective of this ASU (commonly known as the Current Expected Credit Loss Impairment Model, or CECL, in the industry) is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in CECL replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The life of loan loss concept presents complexities that can decrease capital, and add both volatility to the allowance for loan losses estimates and additional costs. Changes in expectations of future economic conditions will play a large role in CECL and can significantly affect the credit loss estimate. The Company is developing its approach for determining expected credit losses under the new guidance, including the licensing of new software and the development of processes to track loan performance. The total impact of CECL to the Company’s financial statements is unknown but may be material. ~~On October 16, 2019, the FASB affirmed its decision to amend the effective date for the~~The amendments in CECL are effective for smaller reporting companies tofor fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is ~~allowed for fiscal years beginning after December 15, 2018.~~permitted. The Company intends to early adopt CECL effective January 1, ~~2021. Implementation of CECL will be a significant project for the Company through the projected implementation date of January 1, 2021.~~2022.

ASU ~~2018-13,~~ 2019-12,~~Disclosure Framework – Changes to~~Simplifying the ~~Disclosure Requirements~~Accounting for ~~Fair Value Measurement~~Income Taxes – The amendments in this ASU ~~modify~~simplify the ~~disclosure requirements on fair value measurements.~~accounting for income taxes by removing the following exceptions: 1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign

equity method investment becomes a subsidiary; and 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on ~~changes~~income as an income based tax and account for any incremental amount incurred as a non-income-based tax; 2. Requiring that an entity evaluate when a step up in ~~unrealized gains~~the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and ~~losses,~~when it should be considered a separate transaction; 3. Specifying that an entity is not required to allocate the ~~range~~consolidated amount of current and ~~weighted average~~deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority; 4. Requiring that an entity reflect the effect of ~~significant unobservable inputs used~~an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and 5. Making minor Codification improvements for income taxes related to ~~develop Level 3 fair value measurements,~~employee stock ownership plans and investments in qualified affordable housing projects accounted for using the ~~narrative description~~equity method.

The amendments in this ASU related to separate financial statements of ~~measurement uncertainty~~legal entities that are not subject to tax should be applied ~~prospectively~~on a retrospective basis for ~~only~~all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the ~~most recent interim~~beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or ~~annual period presented in~~a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the ~~initial~~beginning of the fiscal year of adoption. All other amendments should be applied ~~retrospectively to all periods presented upon their effective date.~~ on a prospective basis. Early adoption of the amendments in an interim period would require recognition of any adjustments as of the beginning of the annual period that includes that interim period.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019. Adoption~~2020. Early adoption is permitted. The Company is evaluating the impact that the guidance will have on its consolidated financial statements.

On May 1, 2020, the Company completed the acquisition of ~~this ASU will impact~~FSB Bancorp, Inc., a Maryland corporation and the ~~Company’s disclosures but will not impact~~parent holding company of Fairport Savings Bank (“FSB”). On that date, FSB was merged into Evans Bank, a wholly owned banking subsidiary of the ~~Company’s financial condition,~~Company. FSB operated 4 banking offices in New York at the date of acquisition. After application of the election, allocation and proration procedures contained in the merger agreement, the Company paid $17.1 million in cash and issued 422,625 shares of Evans Bancorp, Inc. common stock in exchange for all of the shares of common stock of FSB Bancorp, Inc. outstanding at the time of the acquisition.

The acquisition of FSB was completed subsequent to the first quarter of 2020, thus FSB’s balance sheet and results of operations ~~or cash flows.~~are not included in the Company’s consolidated financial statements for the period ended March 31, 2020. The Company is currently in the process of allocating the purchase price to the fair values of the assets and liabilities acquired in conjunction with the acquisition. As of December 31, 2019, FSB reported $323 million of assets, including $275 million of loans (predominantly residential real estate loans) and $23 million of investment securities, and $292 million of liabilities, including $236 million of deposits.

The Company incurred $0.5 million of merger-related expenses during the three months ended March 31, 2020, consisting largely of professional services of attorneys, accountants, investment bankers and other advisors. There were no merger-related expenses incurred during three months ended March 31, 2019.

~~ASU 2018-14,~~ ~~Disclosure Framework – Changes~~The Company’s leases, consisting of property leases for certain of our bank branches and insurance agency offices, are classified as operating leases. Operating lease Right of Use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets were $3.6 million and $3.7 million as of March 31, 2020 and December 31, 2019, respectively. Lease liabilities were $4.0 million and $4.2 million as of March 31, 2020 and December 31, 2019, respectively. As these leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. Our lease terms include options to extend or terminate the ~~Disclosure Requirements for Defined Benefit Plans~~ ~~– The amendments in this ASU remove disclosures~~lease when it is reasonably certain that ~~no longer~~we will exercise that option. Leases with an initial term of 12 months or less are ~~considered cost beneficial, clarify~~not recorded on the ~~specific requirements of disclosures, and add disclosure requirements identified as relevant.~~ The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Adoption of this ASU will impact the Company’s disclosures but will not impact the Company’s financial condition, results of operations or cash flows.balance sheet.

Lease expense is recognized on a straight-line basis over the lease term. Operating lease expenses were $0.2 million during the three-month periods ended March 31, 2020 and 2019 and are included in other non-interest expense on the consolidated statement of income. Cash paid for amounts included in the measurement of lease liabilities were $0.2 million during the three-month periods ended March 31, 2020 and 2019 and are included in cash flows from operating activities on the consolidated statement of cash flows. The weighted average discount rate related to the Company’s leases was 3.5% as of March 31, 2020. The weighted average remaining lease term related to the Company’s leases was 8.4 years as of March 31, 2020. Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company’s business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company’s loan and investment portfolios, and estimates of the Company’s risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to: general economic conditions, either nationally or in the Company’s market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company’s margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company’s ability to enter new markets successfully and capitalize on growth opportunities; the Company’s ability to successfully integrate acquired entities; loan losses in excess of the Company’s allowance for loan losses; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; the impact of such changes in accounting pronouncements and practices being greater than anticipated; the ability to realize the benefit of deferred tax assets; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in consumer spending, borrowing and saving habits; changes in the Company’s organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company’s periodic reports filed with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019. Many of these factors are beyond the Company’s control and are difficult to predict. In addition, the COVID-19 pandemic in the United States is expected to have a complex and significant impact on the economy, the banking industry and the Company in future periods. While the full impact of COVID-19 on future financial results is uncertain and not currently predictable, the Company believes that impact could have a material effect on customers’ ability to meet their borrowing obligations.

Because of these and other uncertainties, the Company’s actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise, except to the extent required by law.

Effects on Our Market Area – The Company’s commercial and consumer banking products and services are offered primarily in New York State, where governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020. The Governor of New York has issued a series of orders, including an order that, subject to limited exceptions, all individuals stay at home and non‑essential businesses cease all activities. The Company has remained open despite these orders because banks have been identified as providing essential services. The Company has been serving its customers through a variety of channels, including drive-up windows, limited appointment hours for personal meetings at certain branches, mobile banking, on-line banking, remote deposit capture and call centers.

Policy and Regulatory Developments – Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

Effects on Our Business – The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on is business. In particular, it is anticipated that a significant portion of the Company’s borrowers in the hotel, entertainment, the personal services industry, certain restaurants and some manufacturers will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and may adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans.

The Company’s Response – We have taken numerous steps in response to the COVID-19 pandemic, including the following:

On May 1, 2020, the Company completed the acquisition of FSB Bancorp, Inc., a Maryland corporation and the parent holding company of Fairport Savings Bank (“FSB”). On that date, FSB was merged into Evans Bank, a wholly owned banking subsidiary of the Company. FSB operated 4 banking offices in New York at the date of acquisition. The acquisition of FSB was completed subsequent to the first quarter of 2020, thus FSB’s balance sheet and results of operations are not included in the Company’s consolidated financial statements for the period ended March 31, 2020. The Company is currently in the process of allocating the purchase price to the fair values of the assets and liabilities acquired in conjunction with the acquisition. As of December 31, 2019, FSB reported $323 million of assets, including $275 million of loans (predominantly residential real estate loans) and $23 million of investment securities, and $292 million of liabilities, including $236 million of deposits.

The Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the Company’s Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions, and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. Refer to Note 3 – “Fair Value Measurements” to the Company’s Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.

Significant accounting policies followed by the Company are presented in Note 1 – “Organization and Summary of Significant Accounting Policies” to the Audited Consolidated Financial Statements included in Item 8 in its Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company’s Unaudited Consolidated Financial Statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable incurred losses in the Company’s loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Company’s Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 describes the methodology used to determine the allowance for loan losses.

The amount of goodwill reflected in the Company’s Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is performed annually as of December 31. No impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its carrying value. ~~There were no triggering events~~

Changes in the ~~nine-month~~macroeconomic environment resulting from the COVID-19 pandemic was a triggering event in the three month period ended ~~September 30, 2019~~March 31, 2020 that resulted in the Company considering an interim impairment test. The Company had $10.9 million in goodwill as of March 31, 2020, all of which stems from the acquisition of various insurance agencies and is allocated to the insurance agency reporting unit. The Company evaluated the currently available information of the economic impact of the pandemic in relation to the nature of the insurance agency’s operations and the results of the December 31, 2019 goodwill impairment test which concluded that the fair value of the tested reporting unit substantially exceeded its carrying value. The Company determined that it is more likely than not that the reporting unit’s fair value will continue to exceed its carrying amount.

Total gross loans were $1.2 billion at ~~September 30, 2019,~~March 31, 2020, a $7$20 million or ~~1% increase from June 30, 2019 and a $64 million or 6%~~2% increase from December 31, ~~2018.~~2019 and a $61 million or 5% increase from March 31, 2019.

Loans secured by real estate were ~~$954~~$987 million at ~~September 30, 2019,~~March 31, 2020, reflecting a ~~$12~~$15 million or 1%2% increase from ~~$942 million at June 30, 2019 and a $27 million or 3% increase from $927~~$972 million at December 31, ~~2018.~~2019 and a $46 million or 5% increase from $941 million at March 31, 2019. Commercial real estate loans, including construction loans, were ~~$724~~$763 million at ~~September 30, 2019, $13~~March 31, 2020, $20 million or 2%3% higher than the ~~$711 million balance at the end of the second quarter of 2019 and $26 million or 4% higher than the $698~~$743 million balance at the end of the fourth quarter of ~~2018.~~2019 and $53 million or 8% higher than the balance at March 31, 2019. Commercial real estate is the largest part of the Company’s loan portfolio and has historically been the highest growth segment of the portfolio. The ~~market~~Company’s Western New York footprint continued to experience strong demand for commercial real estate induring the ~~Company’s footprint in Western New York has been strong in recent years.~~first quarter of 2020. The demand, along with the Company’s dedicated resources to commercial real estate lending, led to 7%strong growth at an annualized ~~growth~~ rate of 11% in the ~~third~~first quarter of ~~2019.~~2020.

~~Residential~~In the first quarter of 2020, residential mortgage originations were $6$5 million ~~in the third and second quarters of 2019,~~ compared with ~~$14~~the previous quarter’s originations of $9 million ~~in last year’s third quarter. The Company originated $19 million in residential mortgages in the first nine months of 2019, compared to $35~~and $7 million in the first ~~nine months~~quarter of ~~2018. The decrease in residential mortgage originations is attributable to reduced staffing in~~ 2019. Residential mortgages sold in the ~~third~~first quarter of ~~2019~~2020 equated to approximately ~~49%~~71% of the residential mortgages originated by the Company during the quarter, as compared with ~~43%~~59% in the ~~second~~fourth quarter of 2019 and ~~3% in the third quarter of 2018. Residential mortgages sold~~31% in the first ~~nine months~~quarter of ~~2019 were 41% of residential mortgages originated during the period compared with 1% in the first nine months of 2018.~~2019. Management decides to keep or sell residential mortgage loans at the time of origination based on interest rate risk management and the risk-adjusted return of alternative investment sources such as mortgage-backed securities.

The Company has also focused on growth opportunities in commercial and industrial (“C&I”) lending as a way to diversify its overall loan portfolio. The C&I portfolio was ~~$262~~$256 million at ~~September 30, 2019,~~March 31, 2020, representing a $6$5 million or 2% ~~decrease from $268 million at June 30, 2019 but a $36 million or 16%~~ increase from ~~$226~~$251 million at December 31, ~~2018.~~2019, and $14 million or 6% higher than the $242 million balance at March 31, 2019. The increase in C&I balances during the ~~first nine months of 2019~~quarter equates to ~~a 21%~~an 8% annualized growth rate. C&I lending is a critical component of the Company’s strategy as C&I relationships can often include core deposits.

~~Total non-performing~~Non-performing loans, defined as accruing loans greater than 90 days past due and nonaccrual loans, totaled ~~$14~~$17 million, or ~~1.13%~~1.34% of total loans outstanding at ~~September 30, 2019,~~March 31, 2020, compared with ~~$11~~$14 million, or ~~0.91% of total loans outstanding, as of June 30, 2019 and $19 million, or 1.64%~~1.17% of total loans outstanding, as of December 31, ~~2018.~~2019 and $20 million, or 1.69% of total loans outstanding, as of March 31, 2019. The increase in non-performing loans ~~compared with~~in the ~~second~~first quarter of ~~2019 reflects $2.3 million related to a single~~2020 reflected higher C&I ~~relationship that was changed to~~and commercial real estate nonaccrual status during the third quarter of 2019. The decrease in non-performing loans compared with December 31, 2018 is due to a payoff of a single commercial construction loan of $8 million that was in nonaccrual status. loans.

Commercial credits graded as “special mention” and “substandard,” or the criticized loan portfolio, were ~~$54~~$56 million at ~~September 30, 2019,~~March 31, 2020, a ~~$11~~$5 million increase from ~~$43 million at June 30, 2019 and $16 million increase from $38~~$51 million at December 31, ~~2018.~~2019 and an $8 million increase from $48 million at March 31, 2019. The increase in criticized loans in the ~~third~~first quarter of ~~2019 includes $8~~2020 primarily reflected a $5 million ~~in commercial real estate loans and $3 million in~~ C&I ~~loans~~loan that ~~were~~was downgraded to ~~criticized~~special mention status during the quarter. In comparison to December 31, 2018, the increase includes $20 million in commercial real estate loans and $9 million in C&I loans that were downgraded to criticized in the first nine months of 2019, offset by paydowns of $13 million including the paydown of a single commercial construction loan of $8 million. The level of criticized loans can fluctuate as new information is constantly received on the Company’s borrowers and their financial circumstances change over time. As noted in Note 4 to the Company’s Unaudited Financial Statements included in Part I of this Quarterly Report on Form 10-Q, internal risk ratings are the credit quality indicators used by the Company’s management to determine the appropriate allowance for loan losses for commercial credits. “Special mention” and “substandard” loans are weaker credits with a higher risk of loss and are categorized as “criticized” credits rather than “pass” or “watch” credits.

The Company maintains an allowance for loan losses that in management’s judgment appropriately reflects losses inherent in the loan portfolio. The allowance for loan losses totaled ~~$15.4~~$18.2 million ~~at September 30, 2019, $15.2 million at June 30, 2019, and $14.8 million at December 31, 2018. At the end of September 30, 2019 and June 30, 2019 the allowance for loan losses was 1.26%~~or 1.46% of total loans outstanding at March 31, 2020, compared with ~~1.28%~~$15.2 million or 1.24% of total loans outstanding as of December 31, ~~2018.~~2019 and $15.2 million or 1.28% at March 31, 2019. The Company ~~released $0.4 million in allowance for loan losses in the third quarter of 2019, compared to $0.1~~recorded $3.0 million in provision for loan losses in the ~~second~~first quarter of ~~2019, and $0.3~~2020, compared with $0.1 million ~~provision for loan loss in last year’s third quarter. The~~ release of allowance for loan losses induring the ~~third~~fourth quarter of 2019 ~~reflects~~and $0.5 million provision for loan losses in last year’s first quarter. The $3.0 million provision for loan losses for the first quarter of 2020 includes a ~~decrease~~$2.2 million reserve build in ~~net loan charge-offs~~response to economic trends and conditions which have been significantly impacted by the COVID-19 pandemic. The remaining provision was due to ~~a single commercial loan recovery of $0.7 million, partially offset by~~ an increase in ~~non-performing loans.~~specific reserve levels on impaired loans and strong loan growth. The $0.1 million release of allowance for loan losses for the fourth quarter of 2019 was due to improved asset quality on impaired loans and marginal loan growth in that quarter.

Total investment securities were ~~$137~~$162 million at ~~September 30, 2019 and June 30, 2019~~March 31, 2020, compared with ~~$134~~$130 million at December 31, ~~2018.~~2019 and $141 million at March 31, 2019. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks and the Federal Reserve, ~~decreased to $15~~were $41 million at ~~September 30, 2019 from $46 million at June 30, 2019 and $26~~March 31, 2020 compared to $28 million at December 31, ~~2018.~~2019, and $56 million at March 31, 2019. 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 flattened yield curve there is a reduced advantage to purchasing longer-term investment securities.~~ Average investment securities and interest-bearing cash were ~~12%~~14% of average interest-earning assets in the ~~third~~first quarter of 2020, compared with 12% in the fourth quarter of 2019 and ~~2018, compared with 13%~~14% in ~~the second quarter of 2019.~~last year’s first quarter.

The Company’s highest concentration in its securities portfolio was in ~~available-for-sale~~available for sale U.S. government sponsored mortgage-backed securities at 75%, 74% and 56% of total investment securities at ~~September 30, 2019 compared with 70% at June 30,~~March 31, 2020, December 31, 2019 and ~~57% at December~~March 31, ~~2018.~~2019, respectively. The concentration in tax-advantaged debt securities issued by state and political subdivisions was 4%, 4% and ~~U.S. government-sponsored agency bonds was 5% and 21%, respectively,~~16% of the total securities portfolio at ~~September 30, 2019, compared with 4% and 26% at June 30,~~March 31, 2020, December 31, 2019, and ~~18%~~March 31, 2019, respectively. The concentration in U.S. government-sponsored agency bonds was 22%, 22% and ~~25%~~28% of the total securities portfolio at March 31, 2020, December 31, ~~2018.~~2019, and March 31, 2019, respectively.

The total net unrealized gain position of the available-for-sale investment portfolio was ~~$1.3 million and $0.6~~$3.2 million at ~~September 30,~~March 31, 2020, compared with $0.7 million at December 31, 2019 and ~~June 30, 2019, respectively, compared with~~ a net unrealized loss position of ~~$3.2~~$1.4 million at ~~December~~March 31, ~~2018. The changes in unrealized gains and losses during 2019 resulted primarily from a rebalancing of the investment portfolio.~~2019. The securities in an unrealized ~~loss~~gain position at the end of the ~~third~~first quarter of ~~2019~~2020 reflect ~~differences~~a decrease in market interest rates rather than a reduction in credit concerns. Management believes that the credit quality of the securities portfolio as a whole is strong.

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.

Total deposits at March 31, 2020 were ~~$1.26~~$1.33 billion, ~~at September 30, 2019 compared with $1.28 billion at June 30, 2019. Total deposits increased $44~~a $60 million or 4%5% increase from ~~$1.22~~$1.27 billion at December 31, ~~2018.~~2019 and a $52 million or 4% increase from $1.28 billion at March 31, 2019. The ~~increase during~~growth in the first ~~nine~~three months of ~~2019~~2020 reflects growth in municipal savings of $21 million or 16%, NOW deposits of $19 million or 13%, and $8 million or 2% of consumer savings deposits. Commercial savings and demand deposits ~~of $40~~both grew by $10 million ~~NOW deposits (interest-bearing checking accounts) of $31 million,~~each or 8% and 4%, respectively. The increases were offset by a ~~$24 million~~ decrease in time deposits of $7 million or 3%. The year-over-year increase was primarily due to NOW deposit growth of $37 million, or 30%, and demand deposit growth of $31 million or 13%. Savings deposits increased $7 million, which reflected $15 million in additional consumer deposits, partially offset by a $3decrease of $8 million ~~decrease~~ in ~~savings deposits.~~municipal balances. Time deposits decreased $24 million, or 8%, of which $15 million were brokered. Further discussion of deposit growth and changes in deposit mix are in the “Analysis of Results of Operations.” Due to the transactional nature of demand deposits, average balances are a useful metric to meaningfully measure sustained growth rates. Average demand deposits were $282 million in the first quarter of 2020, a 3% increase from $273 million in the fourth quarter of 2019, and 16% higher than the $242 million average balance in the first quarter of 2019. Of the Company’s $40 million in average demand deposit growth over the prior year’s first quarter, $23 million was in commercial accounts.

The Company had $10 million in other borrowings at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. This represents a single $10 million long-term advance with the ~~FHLBNY~~Federal Home Loan Bank of New York (“FHLBNY”) scheduled to mature in the second quarter of 2020. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with deposits along with the line usage’s impact on interest rate risk. There were no overnight borrowings at ~~September 30, 2019.~~March 31, 2020.

The following tables present the significant categories of the assets and liabilities of the Company, interest income and interest expense, and the corresponding yields earned and rates paid for the periods indicated. The assets and liabilities are presented as daily averages. The average loan balances include both performing and non-performing loans. Investments are included at book value. Yields are presented on a non-tax-equivalent basis.




		Three months ended September 30, 2019						Three months ended September 30, 2018							Three months ended March 31, 2020						Three months ended March 31, 2019
		Average		Interest				Average		Interest					Average		Interest				Average		Interest
		Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
		Balance		Paid		Rate		Balance		Paid		Rate			Balance		Paid		Rate		Balance		Paid		Rate
		(dollars in thousands)						(dollars in thousands)							(dollars in thousands)						(dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net		$	1,202,634	$	15,645	5.16	%	$	1,127,173	$	13,676	4.81	%		$	1,219,230	$	14,546	4.80	%	$	1,153,067	$	14,362	5.05	%
Taxable securities			140,006		993	2.81	%		120,004		805	2.66	%			129,966		1,049	3.25	%		120,099		801	2.70	%
Tax-exempt securities			3,725		48	5.11	%		25,118		146	2.31	%			6,063		47	3.12	%		21,150		130	2.49	%
Interest bearing deposits at banks			24,661		159	2.56	%		12,641		63	1.98	%			57,319		181	1.27	%		44,024		249	2.29	%

Total interest-earning assets			1,371,026	$	16,845	4.87	%		1,284,936	$	14,690	4.54	%			1,412,578	$	15,823	4.51	%		1,338,340	$	15,542	4.71	%

Non interest-earning assets:

Cash and due from banks			14,522						14,095							14,424						13,515
Premises and equipment, net			12,850						10,428							13,807						10,501
Other assets			62,141						62,879							61,573						62,370

Total Assets		$	1,460,539					$	1,372,338						$	1,502,382					$	1,424,726

LIABILITIES & STOCKHOLDERS' EQUITY	LIABILITIES & STOCKHOLDERS' EQUITY													LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW		$	134,008	$	151	0.45	%	$	115,417	$	79	0.27	%		$	144,564	$	181	0.50	%	$	112,571	$	82	0.30	%
Savings			591,585		1,346	0.90	%		581,484		1,023	0.70	%			605,103		1,316	0.87	%		591,641		1,174	0.80	%
Time deposits			281,798		1,541	2.17	%		274,275		1,310	1.89	%			274,576		1,379	2.02	%		298,586		1,587	2.16	%
Other borrowed funds			10,000		43	1.71	%		11,035		50	1.80	%			10,000		45	1.81	%		10,000		43	1.74	%
Junior subordinated debentures			11,317		141	4.94	%		11,330		141	4.94	%			11,330		124	4.40	%		11,330		146	5.23	%
Securities sold U/A to repurchase			3,917		2	0.20	%		3,384		1	0.12	%			3,378		2	0.24	%		4,416		2	0.18	%

Total interest-bearing liabilities			1,032,625	$	3,224	1.24	%		996,925	$	2,604	1.04	%			1,048,951	$	3,047	1.17	%		1,028,544	$	3,034	1.20	%

Noninterest-bearing liabilities:
Demand deposits			261,089						233,393							281,624						242,030
Other			22,231						17,045							22,127						21,219
Total liabilities		$	1,315,945					$	1,247,363						$	1,352,702					$	1,291,793

Stockholders' equity			144,594						124,975							149,680						132,933

Total Liabilities and Equity		$	1,460,539					$	1,372,338						$	1,502,382					$	1,424,726

Net interest income				$	13,621					$	12,086						$	12,776					$	12,508

Net interest margin						3.94	%					3.73	%						3.64	%					3.79	%

Interest rate spread						3.63	%					3.50	%						3.34	%					3.51	%

Nine months ended September 30, 2019

Nine months ended September 30, 2018

Average

Interest

Average

Interest

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

Balance

Paid

Rate

Balance

Paid

Rate

(dollars in thousands)

(dollars in thousands)
ASSETS

Interest-earning assets:

Loans, net

$
1,179,875

$
45,149

5.12
%

$
1,097,814

$
39,238

4.78
%
Taxable securities

132,264

2,736

2.77
%

124,487

2,465

2.65
%
Tax-exempt securities

12,227

263

2.88
%

29,106

512

2.35
%
Interest bearing deposits at banks

32,202

564

2.34
%

6,582

88

1.79
%

Total interest-earning assets

1,356,568

$
48,712

4.80
%

1,257,989

$
42,303

4.50
%

Non interest-earning assets:

Cash and due from banks

13,845

13,902

Premises and equipment, net

11,318

10,469

Other assets

62,054

58,875

Total Assets

$
1,443,785

$
1,341,235

LIABILITIES & STOCKHOLDERS' EQUITY

Interest-bearing liabilities:

NOW

$
123,443

$
345

0.37
%

$
116,736

$
233

0.27
%
Regular savings

596,250

3,835

0.86
%

570,182

2,617

0.61
%
Time deposits

289,998

4,703

2.17
%

227,929

2,819

1.65
%
Other borrowed funds

10,014

130

1.74
%

38,052

499

1.75
%
Junior subordinated debentures

11,326

431

5.09
%

11,330

391

4.61
%
Securities sold U/A to repurchase

3,729

5

0.18
%

6,892

10

0.19
%

Total interest-bearing liabilities

1,034,760

$
9,449

1.22
%

971,121

$
6,569

0.90
%

Noninterest-bearing liabilities:

Demand deposits

249,157

232,082

Other

21,356

15,634

Total liabilities

$
1,305,273

$
1,218,837

Stockholders' equity

138,512

122,398

Total Liabilities and Equity

$
1,443,785

$
1,341,235

Net interest income

$
39,263

$
35,734

Net interest margin

3.87
%

3.80
%

Interest rate spread

3.58
%

3.60
%

Net income was ~~$5.2~~$0.2 million, or ~~$1.04~~$0.04 per diluted share, in the ~~third~~first quarter of ~~2019,~~2020, compared with ~~$4.4~~$3.7 million, or ~~$0.88~~$0.75 per diluted share, in both the ~~second~~fourth and first quarters of 2019. The Company’s first quarter 2020 results included a $3.0 million provision for loan loss compared with a release of $0.1 million form the allowance for loan losses in the fourth quarter of 2019 and ~~$4.8~~a provision of $0.5 million ~~or $0.97 per diluted share,~~ in ~~last year’s third quarter. The increase over comparative periods reflects~~the first quarter of 2019. Economic trends and conditions reflecting the impact of COVID-19 at the end of the first quarter resulted in higher ~~net interest~~estimates of expected credit losses in the Company’s loan portfolio compared with prior quarter estimates. While the full impact of COVID-19 on future financial results is uncertain and not currently predictable, the Company believes that impact could have a material effect on customers’ ability to meet their borrowing obligations. Also impacting the current quarter was lower non-interest income due to ~~loan growth~~a historic rehabilitation tax credit transaction and ~~a decrease in loan loss provision, partially offset by an increase in~~higher non-interest ~~expense.~~expense due to salaries and benefit expenses and merger costs related to the FSB acquisition. Return on average equity was ~~14.29%~~0.55% for the ~~third~~first quarter of ~~2019,~~2020, compared with ~~12.71%~~10.16% in the ~~second~~fourth quarter of 2019 and ~~15.35%~~11.19% in the ~~third~~first quarter of ~~2018.~~2019.

Net interest income ~~increased $0.5 million, or 4%,~~remained relatively flat from the ~~second~~fourth quarter of 2019, ~~and $1.5~~but increased $0.3 million, or ~~13%~~2%, from the prior-year ~~third quarter to $13.6 million in the third quarter of 2019.~~first quarter. The ~~increases were~~year-over-year increase was driven by average interest-earning asset growth, particularly in the commercial loan ~~portfolio, partially offset by an increase in interest expense.~~portfolio. Average commercial loans, including commercial real estate and commercial and industrial loans, were ~~$983 million,~~$1.0 billion, up ~~$18~~$72 million from the 2019 ~~second quarter and $65 million from the 2018 third~~first quarter. ~~The third quarter of 2019 also included $0.2 million of interest related to the recovery of a single commercial loan that was charged-off in a previous period.~~

~~Third~~First quarter net interest margin of ~~3.94%. When excluding the interest related to the recovery, net interest margin was 3.89%, an increase of 2~~3.64% declined 3 basis points from the 2019 ~~second~~fourth quarter and 1615 basis points from the ~~third~~first quarter of 2018. The modest increase from the linked quarter resulted from changes in the mix of interest earning assets reflecting the utilization of cash to achieve loan growth, while the change from the prior year reflects increased yields on loans, offset by higher funding costs, reflecting higher interest rates and competitive deposit market pricing. Excluding the interest related2019 largely due to the ~~recovery,~~Federal Reserve’s decrease of the fed funds rate during the first quarter of 2020. The lower yield on loans ~~increased 30 basis points~~ when compared with the ~~third~~fourth quarter of ~~2018.~~2019 and the first quarter of 2019 reflects a decrease of 12 and 25 basis points, respectively. The cost of interest-bearing liabilities was 1.17% in the first quarter of 2020, compared with 1.24% in the ~~third quarter of 2019, compared with 1.23% in the second~~fourth quarter of 2019 and ~~1.04%~~1.20% in the ~~third quarter of 2018.~~

~~The Company released $0.4 million of allowance for loan losses in the third~~first quarter of 2019. ~~Provision for loan losses~~The average cost of time deposits was ~~$0.1 million~~2.02% in the ~~second~~first quarter of 2020, compared with 2.09% in the fourth quarter of 2019 and ~~$0.3~~2.16% in the first quarter of 2019. Average time deposits comprised 21% of average total deposits during the first quarter of 2020, compared with 22% in the fourth quarter of 2019, and 24% in and the first quarter of 2019. The Company has brokered time deposits as part of its funding strategy. Average brokered time deposits were $27 million during the first quarter of 2020 and $28 million in the ~~third~~fourth quarter of ~~2018.~~ 2019, and $41 million in the first quarter of 2019.

The $3.0 million provision for loan losses for the first quarter of 2020 includes a $2.2 million reserve build in response to economic trends and conditions which have been significantly impacted by the COVID-19 pandemic. The remaining provision was due to an increase in specific reserve levels on impaired loans and strong loan growth. The $0.1 million release of allowance for loan losses ~~during~~for the ~~third~~fourth quarter of 2019 ~~reflects a decrease in net loan charge-offs~~was due to ~~the single commercial~~improved asset quality on impaired loans and marginal loan ~~recovery of $0.7 million, partially offset by an increase~~growth in ~~non-performing loans.~~that quarter.

Non-interest income was ~~$5.2~~$3.3 million in the ~~third~~first quarter of ~~2019,~~2020, compared with ~~$4.7~~$4.0 million in the ~~second~~fourth quarter of 2019 and ~~$4.8~~$4.2 million in the prior year ~~third~~first quarter. The first quarter of 2020 included a $0.6 million net reduction of non-interest income related to an investment in an historic rehabilitation tax credit. There were no significant historic tax credit transactions in the fourth and first quarters of 2019.

The Company is actively engaged in the community by financing historic rehabilitation projects in the City of Buffalo and enhances its yield by investing in the related tax credits. When a project is completed, the Company begins to recognize tax benefits with an associated reduction in the investment. In the first quarter of 2020, the reduction to net income related to the historic rehabilitation tax credit was $0.4 million as a $1.9 million refundable New York State tax credit was recorded in non-interest income and a corresponding $0.2 million tax benefit was realized in income tax expense, offset by a $2.5 million write-off on the investment. The write-off was contemplated when management priced the initial investment in the tax credit project. This transaction reduces our annual effective tax rate from 25.4% to 16.7%, providing additional tax benefits throughout 2020.

Insurance revenue of $2.4 million increased $0.3 million from the fourth quarter of 2019 and remained relatively flat from last year’s first quarter. The increase in ~~non-interest income compared with~~insurance service and fee revenue from the ~~prior quarter is primarily due to seasonally higher insurance revenue. Other income in the third~~fourth quarter of 2019 ~~includes $0.2 million of insurance proceeds related to legal~~reflects seasonally higher policy renewals for institutional clients, including businesses and ~~professional fees incurred to respond to a data security incident and related matters.~~municipalities.

Non-interest expenses of ~~$12.3~~$12.9 million in the ~~third~~first quarter of 2020 increased 6% from the fourth quarter of 2019 ~~increased 7%~~and 15% from the prior-year ~~period~~period. Salaries and 1%benefits costs were $7.8 million in the first quarter of 2020, an increase of 6% from the ~~second~~fourth quarter of ~~2019.~~2019 and 9% from last year’s first quarter. The ~~most significant component~~increase from the fourth quarter of ~~the increase was~~2019 included seasonally higher ~~salaries~~employee benefits expenses. Salaries and ~~employee benefit costs as a result of severance and~~benefits expense incudes the addition of strategic personnel hires to support the Company’s continued growth. ~~Salaries and employee benefits costs were $7.6 million in the third quarter of 2019, an increase of 8% from last year’s third quarter.~~

Professional services fees was relatively flat compared to the second quarter of 2019, but was $0.4 million higher than last year’s third quarter. The increase in professional service fees includes $0.2 million related to legal and professional fees incurred to respond to a data security incident and related matters, plus incremental project costs designed to enhance technology and continue to be prepared to respond to future threats which impact the banking industry at large. The increase from the prior year period also includes $0.1 million of broker commissions related to our employee benefits insurance business, and generally higher legal and accounting expenses.

Technology and communications expenses were $1.1 million in the ~~third~~first quarter of 2020 and ~~second~~the fourth quarter of 2019, an increase of $0.2 million from ~~the~~ last year’s ~~third~~first quarter. ~~The increase in technology and communications was~~Technology expenses increased from the prior year period due to higher ~~software costs and volume related ATM card fees and~~ online banking ~~activity.~~

~~The third quarter of 2019 FDIC insurance expense was offset by the application of the FDIC’s small bank assessment credit.~~

~~The Company’s efficiency ratio improved to 64.8% compared with 67.5% in the second quarter of 2019~~activity and ~~66.9% in last year’s third quarter.~~

Income tax expense was $1.8 million, or an effective tax rate of 25.6%, for the third quarter of 2019 compared with 22.1% in the second quarter of 2019 and 6.7% in the third quarter of 2018. Last year’s third quarter income taxes were reduced by $0.7 million due to a change in estimate of when certain state historic tax credits will be taxable for federal purposes. Historic tax credit transactions lowered the effective tax rate by 13.8% in the third quarter of 2018.software costs.

~~Net interest income~~Professional services expense was ~~$39.3~~$1.4 million ~~for~~in the first ~~nine months~~quarter of 2020, compared with $1.1 million in the fourth quarter of 2019 ~~a $3.5~~and $0.7 million ~~or 10% increase from~~in last year’s first quarter. The first quarter of 2020 professional service fees included $0.5 million in merger-related costs associated with the ~~first nine months~~acquisition of ~~2018.~~Fairport Savings Bank. The ~~increase in net interest income is attributable~~remaining variance to ~~a $99 million or 8% increase in average interest-earning assets and $0.2 million~~the prior-year period was the result of ~~interest~~expenses related to the recovery of a single commercial loan that was previously written-off. The increase in average interest-earning assets reflects average loan growth of $82 million or 7% to $1.2 billion during the first nine months of 2019 compared to the first nine months of 2018. Most of the growth was in commercial loans, including $46 million in average commercial real estate loans and $15 million in average C&I loans. Additionally, average interest-bearing deposits at banks increased $26 million during the first nine months of 2019 compared to the first nine months of 2018.consulting services associated with business intelligence data systems.

The Company’s net interest margin of 3.87% in the first nine months of 2019 was 7 basis points higher than the first nine months of 2018. The yield on average interest-earning assets increased 30 basis points from 4.50% to 4.80%. Average loan yields increased 34 basis points from 4.78% to 5.12%, reflecting the benefit of variable loan re-pricing as short-term interest rates rise. The cost of interest-bearing liabilities was 1.22%, or 32 basis points higher in the first nine months of 2019 when compared with the first nine months of 2018. In reaction to the competitive deposit market the Company has increased promotional pricing on certain deposit products, primarily time deposits. The rate paid on average time deposits increased from 1.65% in the first nine months of 2018 to 2.17% during the first nine months of 2019. The higher overall cost of interest-bearing liabilities also reflects a shift in the Company’s funding mix as the average balance of higher cost time deposits increased. Average time deposits were 28% of total interest-bearing liabilities in the nine-month period ended September 30, 2019, compared with 23% in the first nine months of 2018.

The Company recorded $0.2 million in provision for loan losses in the first nine months period ended September 30, 2019, compared with $1.7 million in the nine-month period ended September 30, 2018. The decrease in provision for loan losses during the first nine months of 2019 compared with the prior year period reflects a decrease in non-performing loans during the current year period, primarily due to the paydown of a single commercial construction loan of $8 million, and a decrease in net loan charge-offs due to the single commercial loan recovery of $0.7 million.

Non-interest income for the first nine months of 2019 increased $1.9 million from the prior year period to $14.1 million. The increase was a result of higher insurance service and fees revenue of $1.4 million resulting from the 2018 acquisition of Richardson and Stout, Inc., and higher deposit service charges of $0.2 million.

Total non-interest expense increased to $35.6 million in the first nine months of 2019, 12% higher than the nine-month period ended September 30, 2018. The increase was mostly attributable to an increase in salaries and employee benefits costs. Salaries and employee benefits costs were $22.3 million for the first nine months of 2019, a $2.1 million or 10% increase from $20.2 million in the prior year period. The year-over-year increase in salary and benefits expense reflects severance and strategic personnel hires to support the Company’s growth. Professional services expenses increased $0.8 million to $2.7 million, primarily due to $0.2 million related to legal and professional fees incurred to respond to a data security incident and related matters, $0.2 million of broker commissions related to our employee benefits insurance business and generally higher legal and accounting expenses. Technology and communications expenses increased $0.6 million to $3.0 million, reflecting higher software costs and volume relating to ATM card fees and online banking activity. FDIC insurance was $0.4 million lower in the first nine months of 2019 when compared to the first nine months of 2018 as a result of lower non-performing assets and the FDIC’s small bank assessment credit.

~~The Company’s~~GAAP efficiency ratio, ~~for the first nine months of 2019 was 66.2%, compared with 66.0% during the prior-year period. The slight increase in the ratio reflects the increase in non-interest~~or noninterest expenses ~~partially offset~~divided by the ~~increase in~~sum of net interest income and ~~non-interest income.~~

~~The Company recorded~~noninterest income, ~~tax expense of $4.2 million for the nine-month period ended September 30, 2019, compared with $2.5 million~~was 79.9% in the first ~~nine months~~quarter of ~~2018. The~~2020, 72.5% in the fourth quarter of 2019, and 67.2% in the first quarter of 2019.

Income tax expense was less than $0.1 million, or an effective tax rate of 16.7%, for the first ~~nine months~~quarter of 2020 compared with $1.0 million, or an effective tax rate of 20.9% in the fourth quarter of 2019 ~~was 24.2%~~and $1.2 million, or an effective tax rate of 24.7%, ~~compared with 17.2%~~ in last year’s first quarter. Excluding the ~~comparable 2018 period. The~~ impact of the historic tax ~~credits on~~credit transaction, the first quarter 2020 effective tax rate ~~for the first nine months of 2018~~ was ~~5.0%~~25.4%. ~~Income taxes for the first nine months of 2018 were reduced by $0.7 million due to a change in estimate of when certain state historic tax credits will be taxable for federal purposes.~~

The Company consistently maintains regulatory capital ratios significantly above the federal “well capitalized” standard, including a Tier 1 leverage ratio of ~~10.11%~~9.92% at ~~September 30, 2019,~~March 31, 2020, compared with ~~9.99% at June 30, 2019 and 9.73%~~10.33% at December 31, ~~2018.~~2019 and 9.74% at March 31, 2019. Book value per share ~~increased to $29.44~~was $29.96 at ~~September 30, 2019,~~March 31, 2020, compared with ~~$28.74 at June 30, 2019, and $27.13~~$30.11 at December 31, ~~2018.~~2019, and $27.66 at March 31, 2019.

On ~~August 22, 2019,~~February 18, 2020, the Company declared a semi-annual cash dividend of ~~$0.52~~$0.58 per share on the Company’s outstanding common stock. The dividend was paid on ~~October~~April 2, ~~2019~~2020 to shareholders of record as of ~~September 11,~~March 12, 2020. This semi-annual dividend represents a $0.06, or 12% increase from its previous semi-annual dividend paid in October 2019. ~~For the full year of 2019, cash dividends totaled $1.04, up 13% over 2018.~~

The Bank utilizes cash flows from the investment portfolio and federal funds sold balances to manage the liquidity requirements related to loan demand and deposit fluctuations. The Bank also has many borrowing options. The Company uses the ~~Federal Home Loan Bank of New York~~FHLBNY as its primary source of overnight funds and also has one long-term advance with FHLBNY. The Company had $10 million in borrowed funds at FHLBNY at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The Company’s use of its overnight line of credit with FHLBNY varies depending on its ability to fund investment and loan growth with core deposits along with the line usage’s impact on interest rate risk. The Company’s funding strategy has resulted in significant time deposit growth, resulting in less usage of the FHLBNY overnight line of credit. The Company has pledged sufficient collateral in the form of residential and commercial real estate loans at FHLBNY that meets FHLB collateral requirements. As a member of the FHLB, the Bank is able to borrow funds at competitive rates. Advances of up to ~~$280~~$316 million can be drawn on the FHLB via an Overnight Line of Credit Agreement between the Bank and the FHLB. The Bank also has the ability to purchase up to $18 million in federal funds from its correspondent banks. By placing sufficient collateral in safekeeping at the Federal Reserve Bank, the Bank could borrow at the discount window. The Bank’s liquidity needs also can be met by more aggressively pursuing time deposits, or accessing the brokered time deposit market, including the Certificate of Deposit Account Registry Service (“CDARS”) network.

Cash flows from the Bank’s investment portfolio are laddered, so that securities mature at regular intervals, to provide funds from principal and interest payments at various times as liquidity needs may arise. Contractual maturities are also laddered, with consideration as to the volatility of market prices. At ~~September 30, 2019,~~March 31, 2020, approximately 4%5% of the Bank’s securities had contractual maturity dates of one year or less and approximately 9%8% had maturity dates of five years or less. Additionally, mortgage-backed securities, which comprise ~~74%~~75% of the investment portfolio at ~~September 30, 2019,~~March 31, 2020, provide consistent cash flows for the Bank.

The Company’s primary source of liquidity is dividends from the Bank. Additionally, the Company has access to capital markets as a funding source.

Management, on an ongoing basis, closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. As part of that monitoring process, management calculates the 90-day liquidity each month by analyzing the cash needs of the Bank. Included in the calculation are liquid assets and potential liabilities. Management stresses the potential liabilities calculation to ensure a strong liquidity position. Included in the calculation are assumptions of some significant deposit run-off as well as funds needed for loan closings and investment purchases. In the Company’s internal stress test at ~~September 30, 2019,~~March 31, 2020, the Company had net short-term liquidity of ~~$202~~$256 million as compared with ~~$249~~$209 million at December 31, ~~2018.~~2019. Available assets of ~~$154~~$207 million, divided by public and purchased funds of ~~$292~~$303 million, resulted in a long-term liquidity ratio of ~~53%~~68% at ~~September 30, 2019,~~March 31, 2020, compared with ~~63%~~59% at December 31, ~~2018.~~2019.

Management does not anticipate engaging in any activities, either currently or in the long term, for which adequate funding would not be available and which would therefore result in significant pressure on liquidity.

The Company believes that the Bank maintains a sufficient level of U.S. government and government agency securities and New York State municipal bonds that can be pledged as collateral for municipal deposits.

Additional information responsive to this Item is contained in the Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which information is incorporated herein by reference.

Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Bank’s financial instruments. The primary market risk that the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Bank to interest rate risk, which occurs when assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Bank is subject to the effects of changing interest rates. The Bank measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for interest-earning assets and interest-bearing liabilities. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income to changes in net interest rates. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans, and expected maturities of investment securities, loans, and deposits. Management supplements the modeling technique described above with analysis of market values of the Bank’s financial instruments and changes to such market values given changes in the interest rates.

The Bank’s Asset-Liability Committee, which includes members of senior management, monitors the Bank’s interest rate sensitivity with the aid of a model that considers the impact of ongoing lending and deposit taking activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changing the pricing of loan and deposit products, and modifying the composition of interest-earning assets and interest-bearing liabilities, and reliance on other financial instruments used for interest rate risk management purposes.

The following table demonstrates the possible impact of changes in interest rates on the Bank’s net interest income over a 12-month period of time:



	Calculated increase (decrease)				Calculated increase (decrease)
	in projected annual net interest income				in projected annual net interest income
	(in thousands)				(in thousands)

		September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Changes in interest rates

+200 basis points	$	(51)	$	1,598	$	(1,932)	$	(32)
+100 basis points		2,153		2,825		1,291		2,327

-100 basis points		(2,292)		(3,026)		NM		(2,455)
-200 basis points		NM		NM		NM		NM

Many assumptions were utilized by management to calculate the impact that changes in interest rates may have on the Bank’s net interest income. The more significant assumptions related to the rate of prepayments of mortgage-related assets, loan and deposit volumes and pricing, and deposit maturities. The Bank assumed immediate changes in rates including 200 basis point rate changes. In the 200 basis point rate reduction scenario, the applicable rate changes may be limited to lesser amounts such that interest rates are not less than zero. The assumptions in the Company’s projections are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Bank’s projected net interest income.

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September 30, 2019~~March 31, 2020 (the end of the period covered by this Report). Based on that evaluation, the Company’s principal executive and principal financial officers concluded that as of ~~September 30, 2019~~March 31, 2020 the Company’s disclosure controls and procedures were effective.

No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business.

In the opinion of management, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely, would have a material effect on the Company’s results of operations or financial condition.

~~There have been no~~In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents a material ~~changes in~~update and addition to the risk factors ~~relating to the Company to those~~previously disclosed in ~~response to Item 1A. Part I of~~the Company’s Annual Report on Form ~~10-K~~10- K for the fiscal year ended December 31, ~~2018.~~2019 as filed with the Securities and Exchange Commission.

The Economic Impact of the COVID-19 Outbreak Has Adversely Affected, and is Likely to Continue to Adversely Affect, the Company’s Business and Results of Operations

In December 2019, a novel coronavirus was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic. On March 12, 2020 the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments, including New York, have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 26 million people nationwide have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. In particular, the spread of the coronavirus has caused the Company to modify business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many employees working remotely and may take further actions required by government authorities or that the Company determines are in the best interests of its employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including the extent to which the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company may be subject to the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

Moreover, the Company’s future success and profitability substantially depends on its executive officers and directors, many of whom have held positions with the Company for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm the Company’s ability to execute its business strategy. The Company may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability. Any one or a combination of the factors identified above could negatively impact the Company’s business, financial condition and results of operations and prospects.

~~In the third quarter of 2019, the Company did not purchase shares of its common stock.~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			Level 1 inputs are quoted prices for identical instruments in active markets;
			Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
			Level 3 inputs are unobservable inputs.


EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands, except share and per share amounts)
	Nine Months Ended September 30,
	2019		2018
INTEREST INCOME
Loans	$	45,149	$	39,238
Interest-bearing deposits at banks		564		88
Securities:
Taxable		2,736		2,465
Non-taxable		263		512
Total interest income		48,712		42,303
INTEREST EXPENSE
Deposits		8,883		5,669
Other borrowings		135		509
Junior subordinated debentures		431		391
Total interest expense		9,449		6,569
NET INTEREST INCOME		39,263		35,734
PROVISION FOR LOAN LOSSES		197		1,678
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		39,066		34,056
NON-INTEREST INCOME
Deposit service charges		1,822		1,605
Insurance service and fees		8,568		7,132
Gain (loss) on sale of securities		42		(98)
Gain on loans sold		105		6
Bank-owned life insurance		492		514
Loss on tax credit investment		-		(165)
Refundable state historic tax credit		-		150
Interchange fee income		1,299		1,325
Other		1,761		1,720
Total non-interest income		14,089		12,189
NON-INTEREST EXPENSE
Salaries and employee benefits		22,273		20,192
Occupancy		2,561		2,280
Advertising and public relations		612		708
Professional services		2,683		1,867
Technology and communications		3,049		2,485
Amortization of intangibles		336		168
FDIC insurance		357		773
Other		3,778		3,388
Total non-interest expense		35,649		31,861
INCOME BEFORE INCOME TAXES		17,506		14,384
INCOME TAX PROVISION		4,240		2,479
NET INCOME	$	13,266	$	11,905

Net income per common share-basic	$	2.71	$	2.48
Net income per common share-diluted	$	2.68	$	2.41
Weighted average number of common shares outstanding		4,889,029		4,807,684
Weighted average number of diluted shares outstanding		4,957,689		4,933,485

See Notes to Unaudited Consolidated Financial Statements



EVANS BANCORP, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands)
	Three Months Ended September 30,
		2019		2018

NET INCOME		$	5,164	$	4,795

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on available-for-sale securities			523		(738)
Defined benefit pension plans:
Amortization of prior service cost			6		7
Amortization of actuarial loss			62		33
Total			68		40
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX			591		(698)
COMPREHENSIVE INCOME		$	5,755	$	4,097

See Notes to Unaudited Consolidated Financial Statements



		Year Ending December 31,
2019 (excluding the nine months ended September 30, 2019)	$	185
2020		748
2021		682
2022		694
2023		589
Thereafter		2,091
Total future minimum lease payments		4,989
Less imputed interest		687
Total	$	4,302



September 30, 2019
($ in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	5,272	$	8,637	$	130	$	883	$	326	$	15,248
Charge-offs		(91)		(55)		(40)		-		-		(186)
Recoveries		747		-		4		-		-		751
Provision (Credit)		(732)		358		45		(87)		(15)		(431)
Ending balance	$	5,196	$	8,940	$	139	$	796	$	311	$	15,382


	Three months ended September 30, 2019					Three months ended September 30, 2018
	(Recorded Investment in thousands)					(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial and Industrial:
Extension of maturity	1	$	21	$	21	1	$	46	$	46
Term-out line of credit	1		42		42	-		-		-
Residential Real Estate & Construction:	-		-		-	-		-		-
Extension of maturity and
interest rate reduction	3		307		307	-		-		-
Commercial Real Estate & Construction:
Deferral of principal	-		-		-	1		8,768		8,768
Home Equities:			-		-	-		-		-
Extension of maturity and
interest rate reduction	1		110		110	-		-		-
Consumer and other loans	-		-		-	-		-		-



	Nine months ended September 30, 2019					Nine months ended September 30, 2018
	(Recorded Investment in thousands)					(Recorded Investment in thousands)
Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial and Industrial:
Extension of maturity	1	$	21	$	21	1	$	46	$	46
Term-out line of credit	1		42		42	1		29		29
Combination of concessions	-		-		-	1		63		63
Residential Real Estate & Construction:
Extension of maturity and
interest rate reduction	3		307		307	-		-		-
Commercial Real Estate & Construction:
Deferral of principal	-		-		-	1		8,768		8,768
Extension of maturity	-		-		-	1		181		181
Combination of concessions	-		-		-	1		154		154
Home Equities:
Deferral of principal	-		-		-	1		100		100
Extension of maturity and
interest rate reduction	3		390		390	-		-		-
Consumer and other loans	-		-		-	-		-		-


	Balance at December 31, 2017		Net Change		Balance at September 30, 2018
	(in thousands)
Net unrealized loss on investment securities	$	(1,049)	$	(2,782)	$	(3,831)
Net defined benefit pension plan adjustments		(2,368)		118		(2,250)
Total	$	(3,417)	$	(2,664)	$	(6,081)



		Year Ending December 31,
2020 (excluding the three months ended March 31, 2020)	$	562
2021		682
2022		694
2023		589
2024		452
Thereafter		1,640
Total future minimum lease payments		4,619
Less imputed interest		617
Total	$	4,002



Period		Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	~~Maximum Number of Shares that may yet be Purchased Under the Plans or Programs (1)~~
~~July 2019:~~	January 2020:
~~July~~January 1, ~~2019~~2020 - ~~July~~January 31, ~~2019~~2020			-	$	-	-	~~100,000~~
~~August 2019:~~	February 2020:
~~August~~February 1, ~~2019~~2020 - ~~August 31, 2019~~February 29, 2020			-	$	-	-	~~100,000~~
~~September 2019:~~	March 2020:
~~September 1, 2019~~March 1,2020 - ~~September 30, 2019~~March 31, 2020			-	$	-	-	~~100,000~~

Total:			-	$	-	-	~~100,000~~


		EXHIBIT INDEX

Exhibit No.		Name


31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1		Certification of Principal Executive Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




32.2		Certification of Principal Financial Officer pursuant to 18 USC Section 1350 Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




101		The following materials from Evans Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2019,~~March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets – ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018;~~2019; (ii) Unaudited Consolidated Statements of Income – Three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018;~~2019; (iii) ~~Unaudited Consolidated Statements of Income – Nine months ended September 30, 2019 and 2018; (iv)~~ Unaudited Statements of Consolidated Comprehensive Income – Three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018; (v) Unaudited Statements of Consolidated Comprehensive Income – Nine months ended September 30, 2019 and 2018; (vi)~~2019; (iv) Unaudited Consolidated Statements of Stockholders' Equity – ~~Nine~~Three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018; (vii)~~2019; (v) Unaudited Consolidated Statements of Cash Flows – ~~Nine~~Three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018;~~2019; and ~~(viii)~~(vi) Notes to Unaudited Consolidated Financial Statements.