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Seneca Financial
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
8-K 2019-01-03 Officers
8-K 2018-11-21 Officers, Other Events, Exhibits
8-K 2018-08-24 Officers, Amend Bylaw, Exhibits
8-K 2018-05-25 Officers
8-K 2018-05-01 Shareholder Vote
8-K 2018-03-29 Accountant, Exhibits
TAL TAL Education Group 19,760
ACGL Arch Capital Group 13,280
CHE Chemed 5,160
JJSF J&J Snack Foods 2,930
ORC Orchid Island Capital 333
SPRO Spero Therapeutics 212
DMPI Delmar Pharmaceuticals 9
WCUI Wellness Center 0
PTX Pernix Therapeutics Holdings 0
INTV Intervoice 0
SNNF 2018-09-30
Part I - Financial Information
Item 1 - Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 tv506762_ex31-1.htm
EX-31.2 tv506762_ex31-2.htm
EX-32 tv506762_ex32.htm

Seneca Financial Earnings 2018-09-30

SNNF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv506762_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

OR

 

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

 

For the transition period from _______ to _______

 

SENECA FINANCIAL CORP.

(Exact Name of Company as Specified in its Charter)

 

Federal   000-55853   82-3128044
(State of Other Jurisdiction of
Incorporation)
  (Commission File No.)   (I.R.S. Employer Identification No.)

 

35 Oswego Street, Baldwinsville, NY 13027

(Address of Principal Executive Office) (Zip Code)

 

(315) 638-0233

(Issuer's Telephone Number including area code)

 

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   x         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 (Section 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   x         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 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 ¨
Non-accelerated filer x
    Smaller reporting company x
    Emerging growth company x

 

If an emerging growth company, indicate by check mark 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  x

 

As of November 9, 2018, there were 1,978,923 shares issued and outstanding of the registrant’s common stock.

 

 

 

 

  

SENECA FINANCIAL CORP.

INDEX

 

  PAGE
NO.
     
PART I - FINANCIAL INFORMATION  
     
Item 1. Consolidated Statements of Financial Condition as of September 30, 2018 (Unaudited) and December 31, 2017 3
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited) 4
  Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited) 5
  Consolidated Statements of Stockholder’s Equity for the Nine Months Ended September 30, 2018 and 2017 (Unaudited) 6
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited) 7
  Notes to Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 49
     
Item 4. Controls and Procedures 49
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 50
Item 1A. Risk Factors 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
Item 3. Defaults upon Senior Securities 50
Item 4. Mine Safety Disclosures 50
Item 5. Other information 50
Item 6. Exhibits 50
     
SIGNATURES 51

 

 2 

 

  

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except per share data)

 

   September 30, 2018   December 31, 2017 
   (Unaudited)     
ASSETS          
Cash and due from banks  $4,302   $4,375 
Securities, available-for-sale   26,643    22,097 
Loans, net of allowance for loan losses of $1,234 (9/30/18) and $1,241 (12/31/17)   151,256    141,150 
Federal Home Loan Bank of New York stock, at cost   2,809    2,340 
Interest receivable   783    666 
Premises and equipment, net   2,502    2,626 
Bank owned life insurance   2,423    2,381 
Other assets   2,011    539 
Total assets  $192,729   $176,174 
LIABILITIES AND STOCKHOLDERS' EQUITY          
LIABILITIES          
Deposits:          
Non-interest bearing  $12,668   $11,357 
Interest bearing   122,911    118,239 
Total Deposits   135,579    129,596 
Short term Federal Home Loan Bank advances   9,500    4,100 
Long term Federal Home Loan Bank advances   23,750    20,400 
Advances from borrowers for taxes and insurance   1,015    1,957 
Pension liability   54    55 
Other liabilities   4,151    1,664 
Total liabilities   174,049    157,772 
STOCKHOLDERS' EQUITY          
Preferred stock, $0.01 par value, 1,000,000 shares authorized and unissued   -    - 
Common stock, $0.01 par value, 19,000,000  shares authorized, 1,978,923  shares issued and outstanding at September 30, 2018 and December 31, 2017   9    9 
Additional paid-in capital   7,846    7,846 
Retained earnings   15,210    14,637 
Unearned ESOP shares, at cost   (750)   (770)
Accumulated other comprehensive loss   (3,635)   (3,320)
Total stockholders' equity   18,680    18,402 
Total liabilities and stockholders' equity  $192,729   $176,174 

 

The accompanying notes are an integral part of these statements.

 

 3 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
INTEREST INCOME                    
Loans, including fees  $1,740   $1,581   $5,065   $4,627 
Securities   210    130    563    381 
Other   8    6    27    14 
Total interest income   1,958    1,717    5,655    5,022 
INTEREST EXPENSE                    
Deposits   319    268    898    718 
Advances and borrowings   168    118    450    329 
Total interest expense   487    386    1,348    1,047 
Net interest income   1,471    1,331    4,307    3,975 
PROVISION FOR LOAN LOSSES   -    60    10    150 
Net interest income after provision for loan losses   1,471    1,271    4,297    3,825 
NON-INTEREST INCOME                    
Service fees   30    25    99    81 
Income from financial services   50    37    140    106 
Fee income   51    41    135    119 
Earnings on bank-owned life insurance   14    14    42    46 
Net gains on sale of residential mortgage loans   11    49    18    122 
Net  gains on sales of available-for-sale securities   -    -    -    1 
Net  loss on sales of fixed assets   -    (3)   -    (3)
Gain on sale of foreclosed real estate   -    5    -    8 
Total non-interest income   156    168    434    480 
NON-INTEREST EXPENSE                    
Compensation and employee benefits   779    634    2,251    1,960 
Core processing   205    181    595    484 
Premises and equipment   125    101    360    309 
Professional fees   60    52    205    288 
Postage & Office Supplies   27    29    86    96 
FDIC premiums   13    31    25    89 
Advertising   45    44    144    130 
Mortgage recording tax   -    16    26    60 
Other   112    90    350    308 
Total non-interest expense   1,366    1,178    4,042    3,724 
Income before provision for income taxes   261    261    689    581 
PROVISION FOR INCOME TAXES   48    55    116    118 
Net income  $213   $206   $573   $463 
                     
Net income per common share - basic and diluted  $0.11    N/A   $0.30    N/A 
                     
Weighted average number of shares outstanding - basic and diluted   1,902,590    N/A    1,903,874    N/A 

 

The accompanying notes are an integral part of these statements.

 

 4 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
                 
NET INCOME  $213   $206   $573   $463 
                     
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX                    
Unrealized gains on available-for-sale securities:                    
Unrealized holding (loss) gains arising during period   (16)   (15)   (399)   286 
                     
Reclassification adjustment for net gains included in net income   -    -    -    (1)
                     
Net unrealized (loss) gains on available-for-sale securities   (16)   (15)   (399)   285 
                     
Defined benefit pension plan:                    
Net gains arising during the period   -    146    -    405 
Reclassification of amortization of net losses recognized in net periodic pension cost   -    51    -    152 
                     
Net changes in defined benefit pension plan   -    197    -    557 
                     
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX   (16)   182    (399)   842 
                     
Tax effect   (3)   62    (84)   286 
                     
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX   (13)   120    (315)   556 
                     
TOTAL COMPREHENSIVE INCOME   $200   $326   $258   $1,019 

 

The accompanying notes are an integral part of these statements.

 

 5 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY
(Unaudited)
(In thousands)

 

                   Accumulated     
       Additional           Other     
   Common   Paid-In   Retained   Unearned ESOP   Comprehensive   Total 
   Stock   Capital   Earnings   Shares   Loss   Equity 
                         
BALANCE, JANUARY 1, 2018  $9   $7,846   $14,637   $(770)  $(3,320)  $18,402 
                               
Net income   -    -    573    -    -    573 
Other comprehensive loss   -    -    -    -    (315)   (315)
ESOP shares committed to be released   -    -    -    20    -    20 
                               
BALANCE, SEPTEMBER 30, 2018  $9   $7,846   $15,210   $(750)  $(3,635)  $18,680 
                               
                               
BALANCE, JANUARY 1, 2017   -    -    13,567    -    (2,787)  $10,780 
                               
Net income   -    -    463    -    -    463 
Other comprehensive income   -    -    -    -    556    556 
                               
BALANCE, SEPTEMBER 30, 2017  $-   $-   $14,030   $-   $(2,231)  $11,799 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 6 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

 

   Nine Months Ended September 30, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $573   $463 
Adjustments to reconcile net income to net cash flow from operating activities:          
Depreciation and amortization   149    124 
Provision for loan losses   10    150 
Net amortization of premiums and discounts on securities   197    202 
Gain on sale of residential mortgage loans   (18)   (122)
Proceeds from sale of residential mortgage loans held for sale   2,949    8,024 
Origination of residential mortgage loans held for sale   (2,931)   (7,902)
Gain on sale of foreclosed real estate   -    (8)
Gain on sale of fixed assets   -    3 
Gain on sale of available-for-sale securities   -    (1)
Amortization of deferred loan fees   75    14 
ESOP compensation expense   20    - 
Earnings on investment in bank owned life insurance   (42)   (46)
Increase in accrued interest receivable   (117)   (5)
Increase in other assets   (1,236)   (917)
Change in deferred income tax benefit   (262)   - 
Increase in other liabilities   2,491    1,972 
Net cash flow (used in) provided by operating activities   1,858    1,951 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Activity in securities available-for-sale          
Proceeds from calls and maturities   -    825 
Proceeds from sales   -    1,224 
Principal repayments   1,901    1,598 
Purchases   (7,043)   (5,962)
Purchases of Federal Home Loan Bank of New York stock   (469)   (67)
Purchase of bank owned life insurance   -    (180)
Net change in loans   (10,086)   (9,309)
Proceeds from sales of foreclosed assets   -    424 
Proceeds from sales of premises and equipment   -    1 
Purchases of premises and equipment   (25)   (657)
Net cash flow used in investing activities   (15,722)   (12,103)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   5,983    20,317 
Decrease  in advances from borrowers for taxes and insurance   (942)   (817)
Proceeds from long-term FHLB advances   3,350    5,900 
Payments of long-term FHLB advances   (2,100)   (1,500)
Increase (decrease) in short-term FHLB advances   7,500    (9,900)
Net cash flow provided by financing activities   13,791    14,000 
Net change in cash and cash equivalents   (73)   3,848 
CASH AND CASH EQUIVALENTS - beginning of period   4,375    1,762 
CASH AND CASH EQUIVALENTS - end of period  $4,302   $5,610 
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid for:          
Interest on deposits and borrowed funds  $1,329   $1,011 
Income taxes  $66   $3 
Transfer of loans to other real estate owned  $-   $451 

 

The accompanying notes are an integral part of these statements.

 

 7 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

1.BASIS OF PRESENTATION

 

Seneca Financial Corp. (the “Company”), a federal corporation that was organized in 2017, is a savings and loan holding company of Seneca Savings (the “Bank”). The Bank maintains its executive offices and main branch in Baldwinsville, New York, with branches in Liverpool and North Syracuse, New York. The Bank is a community-oriented savings bank whose business primarily consists of accepting deposits from customers within its market area and investing those funds primarily in residential mortgage loans. The Bank has one wholly-owned subsidiary: Seneca Savings Insurance Agency, Inc. dba Financial Quest ("Quest"). Quest offers financial planning and investment advisory services and sells various insurance and investment products through broker networks. The consolidated financial statements of the Company include the accounts of Quest and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), the financial position of the Company as of September 30, 2018 and the results of its operations and its cash flows for the periods presented. The interim financial information should be read in conjunction with the annual financial statements and the notes thereto included in the Form 10-K of the Company.

 

The results of operations at and for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results to be expected for the full year or any other period.

 

Use of Estimates – The preparation of financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the estimation of fair values, pension plan and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

 

Summary of Significant Accounting Policies – The accounting and reporting policies of the Company conform to U.S. GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Company’s financial statements for the year ended December 31, 2017 included in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission on April 2, 2018.

 

Change in Accounting Estimate. Due to a change in New York State tax law, mortgage recording tax expenses is a refundable tax credit, at the election of the tax payer. Under New York law, a bank that paid special additional mortgage recording tax (“SMART”) on residential mortgages in most New York counties any year beginning on or before January 1, 2015, may elect to treat the unused portion of the SAMRT credit on those mortgages as overpayment of tax to be carried forward or refunded. Previously, any unused credit was only eligible to be carried forward to future years. The Bank made this election on July 1, 2018 and its impact is immaterial.

 

2.RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amended guidance shortens the amortization period for the premium paid on some classes of callable debt to the earliest call date instead of the bond’s maturity.

 

The amendment more closely aligns the interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. Public companies will have to begin applying the revisions to FASB ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and the related amendments in their first fiscal years that start after December 15, 2018. The changes will have to be used for the quarterly reports for those years. The FASB issued the amendment in response to the concerns that were brought to it about the requirements in ASC 310-20 that sometimes-forced bondholders to record a loss once a bond was called by its issuer. The amended guidance largely affects municipal bonds but also could affect the accounting treatment of some callable corporate debt.

 

For Public Business Entities (“PBEs”) that are U.S. Securities and Exchange Commission (SEC) filers, such as the Company, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The provisions of this new accounting standard are complex and will require substantial analysis prior to the ASU’s implementation. The Company’s management is currently in the process of evaluating the impact that this standard will have on its consolidated financial statements, however, management does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and results of operations.

 

 8 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

2.RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exits) from the date of initial recognition of that instrument. Further, ASU 2016-13 made certain targeted amendments to the existing impairment model for available for sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  ASU 2016-13 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2019 for all public business entities that are SEC filers. Early application is permitted as of the annual reporting periods beginning after December 15, 2018, including interim periods within those periods. An entity will apply the amendments in this ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company’s management is evaluating the potential impact on our consolidated financial statements; however, due to the significant differences in the revised guidance from existing U.S. GAAP, the implementation of this guidance may result in material changes in our accounting for credit losses on financial instruments. We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial reporting.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements.

 

Under the new guidance a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or an operating lease (i.e., the classification criteria for distinguishing between finance leases and operating leases are substantially like the classification criteria for distinguishing between capital leases and operating leases under the previous guidance). However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, ASU No. 2016-02 will require both operating and finance leases to be recognized on the balance sheet. Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. Lessor accounting will remain largely unchanged from current U.S. GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.

 

The amendments in ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. The Company is currently evaluating the effects of the ASU 2016-02 on its consolidated financial statements and disclosures, if any.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The objective of ASU 2014-09 is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects consideration which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will replace most existing revenue recognition guidelines under U.S. GAAP when it becomes effective. In August 2015, the FASB issued an amendment (ASU 2015-14) which defers the effective date of this new guidance by one year. More detailed implementation guidance on ASU 2014-09 was issued in March 2016 (ASU 2016-08), April 2016 (ASU 2016-10) and May 2016 (ASU 2016-12), and the effective date and transition requirements for these ASUs are the same as the effective date and transition requirements of ASU 2014-09. The amendments in ASU 2014-09 are effective for public business entities for annual periods, beginning after December 15, 2017. The guidance allows an entity to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2018. ASU 2014-09 does not apply to revenue associated with financial instruments, including loans, securities, and derivatives, that are accounted for under other U.S. GAAP guidance. For that reason, it did not have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, the new standard did result in new disclosure requirements. See footnote 11.

 

 9 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

2.RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

 

The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations. The Company’s revenue is primarily comprised of interest income on financial instruments, including investment securities and loans, which are excluded from the scope of ASU 2014-09. The Company adopted the standard in the current quarter. The most significant impact of the update for the Company was the additional disclosure requirements relating to non-interest income, specifically service charges and deposit-related fees.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods with those fiscal years. The adoption had no impact on the consolidated financial statements and only impacted fair value measurement disclosures.

 

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This update superseded outdated guidance related to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based payment awards will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the service has been rendered, subject to the probability of satisfying performance conditions when applicable. For public entities, this update is effective for fiscal years beginning after December 15, 2018. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-08, Not for Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This update clarifies the guidance about whether a transfer of assets (or the reduction, settlement or cancellation of liabilities) is a contribution or an exchange transaction. In addition, the guidance clarifies the determination of whether a transaction is conditional. For public entities, this update is effective for contributions made in fiscal years beginning after December 15, 2018.

 

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements to address stakeholder suggestions for minor corrections and clarifications within the codification. The transition and effective date guidance are based on the facts and circumstances of each amendment. Some of the amendments in this update do not require transition guidance and will be effective upon issuance of this update. However, many of the amendments in this update do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company does not expect the new guidance to have a material impact on the consolidated financial statements. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

 

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842. Leases to address certain narrow aspects of the guidance issued in ASU No. 2016-02. This guidance did not change the Company’s assessment of the impact of ASU No. 2016-02 on the consolidated financial statements as described above.

 

 10 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

2.RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

 

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends FASB Accounting Standards Codification (ASC) Topic 842, Leases, to (1) add an optional transition method that would permit entities to apply the new requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption, and (2) provide a practical expedient for lessors regarding the separation of the lease and non-lease components of a contract. This guidance did not change the Company’s assessment of the impact of ASU No. 2016-02 on the consolidated financial statements as described above.

 

In August 2018, the FASB has issued Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, a consensus of the FASB Emerging Issues Task Force, which amends the FASB Accounting Standards Codification (ASC) to provide guidance on accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provided guidance to customers concerning whether a cloud computing arrangement (e.g., software, platform, or infrastructure offered as a service) includes a software license. Pursuant to that guidance, (1) if a cloud computing arrangement includes a software license, the software license element of the arrangement should be accounted for in a manner consistent with the acquisition of other software licenses, or (2) if the arrangement does not include a software license, then the arrangement should be accounted for as a service contract, with the fees associated with the hosting element (service) of the arrangement expensed as they are incurred.

 

Following the issuance of ASU No. 2015-05, constituents requested that the FASB provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. Accordingly, because United States generally accepted accounting principles (U.S. GAAP) do not contain explicit guidance on accounting for such costs, and to address the resulting diversity in practice, the FASB has issued ASU No. 2018-15 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Note that the guidance on accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in ASU No. 2018-15.

 

For Public Business Entities, the amended guidance is effective for fiscal years beginning after December 15, 2019 (i.e., calendar-year 2020), and for interim periods within those fiscal years. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

 

In October 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-16 , Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes , which adds the SOFR OIS as a benchmark rate that businesses can use to designate hedges of interest rate risk. This update adds to U.S. GAAP a new interest rate from the market for U.S. Treasury repurchase contracts to the list of accepted benchmark rates for hedge accounting. The SOFR is calculated by the Fed based on the interest rates banks charge one another in the overnight market for loans they make to one another, typically called repurchase agreements. In introducing the new rate, the Fed said that because it is based on transactions in the open market, it is more reflective of market conditions than LIBOR, which relies more on judgment. Adding the SOFR OIS as an acceptable hedge accounting benchmark for U.S. GAAP is considered a critical step in helping it gain more acceptance in the market. FASB ASC 815 provides guidance on the risks associated with financial assets or liabilities that are allowed to be hedged. Among those risks is the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to a designated benchmark interest rate. U.S. GAAP considers a benchmark rate as a rate that is widely recognized, commonly referenced, and quoted in an active financial market. FASB ASC 815 lists three rates as benchmarks: the rate on direct Treasury obligations of the U.S. government, the Fed Funds Effective Swap Rate (Overnight Index Swap Rate), and the LIBOR swap rate. In 2017, the FASB added a fourth rate, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate when it published ASU No. 2017-12 , Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which made several other changes to simplify hedge accounting and expand its use. The FASB wants businesses and organizations to adopt the amendments in ASU No. 2018-16 at the same time they adopt the changes in ASU No. 2017-12 . For public companies that have adopted ASU No. 2017-12, the new amendments are effective for fiscal years beginning after December 15 and interim periods within those fiscal years. For other companies and organizations that already have adopted ASU No. 2017-12 , the new amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period as long as the company or organization already has adopted the broader 2017 hedge accounting update. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

 

 11 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

3.Securities

 

The amortized cost and fair values of securities, with gross unrealized gains and losses are as follows:

 

   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair Value 
   (In thousands) 
Available-for-sale Securities:                    
                     
September 30, 2018 (Unaudited):                    
Municipal securities  $9,885   $1   $(279)  $9,607 
Mortgage-backed securities and collateralized mortgage obligations   11,562    -    (380)   11,182 
Corporate securities   5,857    19    (22)   5,854 
   $27,304   $20   $(681)  $26,643 
                     
December 31, 2017:                    
Municipal securities  $9,157   $9   $(128)  $9,038 
Mortgage-backed securities and collateralized mortgage obligations   10,378    7    (169)   10,216 
Corporate securities   2,823    20    -    2,843 
   $22,358   $36   $(297)  $22,097 

 

Mortgage backed securities and collateralized mortgage obligations consist of securities that are issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”), Ginnie Mae (“GNMA”), and are collateralized by residential mortgages. U.S. Government and agency obligations include notes and bonds with both fixed and variable rates. Municipal securities consist of government obligation and revenue bonds. Corporate securities consist of variable rate bonds with large financial institutions.

 

Investment securities with carrying amounts of $10.2 million and $9.2 million were pledged to secure advances and for other purposes required or permitted by law for the nine months ended September 30, 2018 and for the year ended December 31, 2017, respectively. 

 

 12 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

3.Securities (Continued)

 

The amortized cost and fair value of debt securities based on the contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

   September 30, 2018         
   (Unaudited)   December 31, 2017 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
   (In thousands) 
Due in one year or less  $500   $501   $-   $- 
Due after one year through five years   2,292    2,286    783    783 
Due after five years through ten years   7,694    7,620    6,523    6,512 
Due after ten years   5,256    5,055    4,674    4,586 
Mortgage-backed securities and collateralized mortgage obligations   11,562    11,181    10,378    10,216 
   $27,304   $26,643   $22,358   $22,097 

 

During the three and nine months ended September 30, 2018, the Company did not sell any securities. During the nine months ended September 30, 2017, the Company sold available-for-sale securities with gross realized gains of $1,258, and gross realized losses of $118.

 

Management has reviewed its loan, mortgage backed securities and collateralized mortgage obligations portfolios and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or originating, these types of investments or loans.

 

 13 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

3.Securities (Continued)

 

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position follows:

 

   Less than Twelve Months   Twelve Months and Over 
   Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
   Fair Value 
   (In thousands) 
                 
September 30, 2018 (Unaudited):                    
Municipal securities  $(73)  $4,091   $(206)  $5,014 
Mortgage-backed securities and collateralized mortgage obligations   (58)   3,789    (322)   7,393 
Corporate securities   (22)   4,031    -    - 
   $(153)  $11,911   $(528)  $12,407 
December 31, 2017:                    
Municipal securities  $(22)  $3,335   $(106)  $4,545 
Mortgage-backed securities and collateralized mortgage obligations   (68)   6,282    (101)   3,420 
   $(90)  $9,617   $(207)  $7,965 

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For the three and nine months ended September 30, 2018 and 2017, the Company did not record an other-than-temporary impairment charge.

 

At September 30, 2018, fourteen municipal securities and thirteen mortgage-backed securities and collateralized mortgage obligations were in a continuous loss position for more than twelve months. At September 30, 2018, twelve municipal securities, fourteen mortgage-backed securities and collateralized mortgage obligations and eight corporate securities were in a continuous loss position for less than twelve months.

 

At December 31, 2017, five collateralized mortgage obligations and twelve municipal securities were in a continuous loss position for more than twelve months. At December 31, 2017, nine municipal securities, ten mortgage backed securities and collateralized mortgage obligations were in a continuous loss position for less than twelve months.

 

The mortgage-backed securities and collateralized mortgage obligations were issued by U.S. Government sponsored agencies. The municipal securities and corporate securities are rated investment grade Standard and Poor’s BBB- or higher. All are paying in accordance with their terms with no deferrals of interest or defaults. Because the decline in fair value is attributable to changes in interest rates, not credit quality, and because management does not intend to sell and will not be required to sell these securities prior to recovery or maturity, no declines are deemed to be other-than-temporary.

 

 14 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS

 

Net loans at September 30, 2018 and December 31, 2017 are as follows:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
   (In thousands) 
         
Mortgage loans on real estate:          
One-to-four family first lien residential  $100,722   $95,697 
Residential construction   3,944    5,978 
Home equity loans and lines of credit   8,390    7,706 
Commercial   23,347    21,673 
           
Total mortgage loans on real estate  $136,403   $131,054 
           
Commercial and industrial   13,011    8,312 
           
Consumer loans   2,569    2,443 
           
Total loans   151,983    141,809 
           
Allowance for credit losses   (1,234)   (1,241)
Net deferred loan origination costs   507    582 
           
Net loans  $151,256   $141,150 

 

Loan Origination / Risk Management

The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by frequently providing management with reports related to loan production, loan quality, loan delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

 15 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS (Continued)

 

Risk Characteristics of Portfolio Segments

The risk characteristics within the loan portfolio vary depending on the loan segment. Consumer loans generally are repaid from personal sources of income. Risks associated with consumer loans primarily include general economic risks such as declines in the local economy creating higher rates of unemployment. Those conditions may also lead to a decline in collateral values should the Company be required to repossess the collateral securing consumer loans. These economic risks also impact the commercial loan segment, however commercial loans are considered to have greater risk than consumer loans as the primary source of repayment is from the cash flow of the business customer. Real estate loans, including residential mortgages, commercial, and home equity loans, comprise approximately 90% of the portfolio at September 30, 2018 and 92% of the portfolio at December 31, 2017. Loans secured by real estate provide collateral protection and thus significantly reduce the inherent risk in the portfolio.

 

Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.

 

Description of Credit Quality Indicators

Real estate, commercial and consumer loans are assigned a "Pass" rating unless a loan has demonstrated signs of weakness as indicated by the ratings below:

 

Special Mention: The relationship is protected but is potentially weak. These assets may constitute an undue and unwarranted credit risk but not to the point of justifying a substandard rating. All loans 60 days past due are classified Special Mention. The loan is not upgraded until it has been current for six consecutive months.

 

Substandard: The relationship is inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledge, if any. Assets so classified have a well-defined weakness or a weakness that jeopardized the liquidation of the debt. All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been current for six consecutive months.

 

Doubtful: The relationship has all the weaknesses inherent in substandard with the added characteristic that the weaknesses make collection based on currently existing facts, conditions, and value, highly questionable or improbable. The possibility of some loss is extremely high.

 

Loss: Loans are considered uncollectible and of such little value that continuance as bankable assets are not warranted. It is not practicable or desirable to defer writing off this basically worthless asset even though partial recovery may be possible in the future.

 

The risk ratings are evaluated at least annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial, real estate or consumer loans.

 

 16 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of September 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS (Continued)

 

The following table presents the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings within the Company's internal risk rating system as of September 30, 2018 and December 31, 2017. There were no doubtful accounts at September 30, 2018 or December 31, 2017.

 

   September 30, 2018 (Unaudited) 
   (In thousands) 
   Pass   Special
Mention
   Substandard   Loss   Total 
Mortgage loans on real estate:                         
One-to-four family first lien residential  $100,722   $-   $-   $-   $100,722 
Residential construction   3,944    -    -    -    3,944 
Home equity loans and lines of credit   8,390    -    -    -    8,390 
Commercial   21,298    -    2,049    -    23,347 
Total mortgage loans on real estate   134,354    -    2,049    -    136,403 
Commercial and industrial   12,753    -    258    -    13,011 
Consumer loans   2,569    -    -    -    2,569 
Total loans  $149,676   $-   $12,307   $-   $151,983 

 

   December 31, 2017 
   (In thousands) 
   Pass   Special
Mention
   Substandard   Loss   Total 
Mortgage loans on real estate:                         
One-to-four family first lien residential  $95,697   $-   $-   $-   $95,697 
Residential construction   5,978    -    -    -    5,978 
Home equity loans and lines of credit   7,706    -    -    -    7,706 
Commercial   19,985    -    1,688    -    21,673 
Total mortgage loans on real estate   129,366    -    1,688    -    131,054 
Commercial and industrial   7,944    77    291    -    8,312 
Consumer loans   2,443    -    -    -    2,443 
Total loans  $139,753   $77   $1,979   $-   $141,809 

 

 17 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS (Continued)

 

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. An age analysis of past due loans, segregated by class of loans, are as follows:

 

   September 30, 2018 (Unaudited) 
   (In thousands) 
   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days
Past Due
   Total
Past Due
   Current   Total Loans
Receivable
 
Mortgage loans on real estate:                              
One-to-four family first lien residential  $711   $504   $653   $1,868   $98,854   $100,722 
Residential construction   -    -    -    -    3,944    3,944 
Home equity loans and lines of credit   -    35    -    35    8,355    8,390 
Commercial   335    112    -    447    22,900    23,347 
Total mortgage loans on real estate   1,046    651    653    2,350    134,053    136,403 
Commercial and industrial   -    -    -    -    13,011    13,011 
Consumer loans   -    -    -    -    2,569    2,569 
Total loans  $1,046   $651   $653   $2,350   $149,633   $151,983 

 

   December 31, 2017 
   (In thousands) 
   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days Past
Due
   Total Past
Due
   Current   Total Loans
Receivable
 
Mortgage loans on real estate:                              
One-to-four family first lien residential  $740   $121   $1,177   $2,038   $93,659   $95,697 
Residential construction   -    -    -    -    5,978    5,978 
Home equity loans and lines of credit   -    -    -    -    7,706    7,706 
Commercial   247    -    -    247    21,426    21,673 
Total mortgage loans on real estate   987    121    1,177    2,285    128,769    131,054 
Commercial and industrial   -    -    -    -    8,312    8,312 
Consumer loans   29    8    -    37    2,406    2,443 
Total loans  $1,016   $129   $1,177   $2,322   $139,487   $141,809 

 

 18 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS (Continued)

 

Nonaccrual loans, segregated by class of loan as of September 30, 2018 and December 31, 2017 are as follows:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
   (In thousands) 
         
Mortgage loans on real estate  $653   $1,177 
Commercial and industrial loans   -    - 
Consumer loans   -    - 
Total nonaccrual loans  $653   $1,177 

 

The following table summarizes impaired loan information by portfolio class:

 

   September 30, 2018 (Unaudited) 
   (In thousands) 
   Recorded
Investment
   Unpaid Principal
Balance
   Related
Allowance
 
With an allowance recorded:               
Mortgage loans on real estate  $781   $781   $64 
Commercial and industrial loans   -    -    - 
    781    781    64 
With no allowance recorded:               
Mortgage loans on real estate   1,396    1,396    - 
Commercial and industrial loans   -    -    - 
    1,396    1,396    - 
                
Total  $2,177   $2,177   $64 
                
   December 31, 2017 
   (In thousands) 
   Recorded
Investment
   Unpaid Principal
Balance
   Related
Allowance
 
With an allowance recorded:               
Mortgage loans on real estate  $318   $318   $7 
Commercial and industrial loans   -    -    - 
    318    318    7 
With no allowance recorded:               
Mortgage loans on real estate   1,640    1,640    - 
Commercial and industrial loans   -    -    - 
    1,640    1,640    - 
                
Total  $1,958   $1,958   $7 

 

 19 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS (Continued)

 

The following table presents the average recorded investment in impaired loans:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
   (In thousands) 
         
Mortgage loans on real estate  $2,068   $1,556 
Commercial and industrial loans   -    177 
           
Total  $2,068   $1,733 

 

Troubled debt restructurings (“TDRs”) occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. A concession is made when the terms of the loan modification are more favorable than the terms the borrower would have received in the current market under similar financial difficulties. These concessions may include, interest by the borrower to satisfy all or part of the debt, or the addition of borrower(s). The Company identifies loans for potential TDRs primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. Generally, we will not return a TDR to accrual status until the borrower has demonstrated the ability to make principal and interest payments under the restructured terms for at least six consecutive months. The Company’s TDRs are impaired loans, which may result in specific allocations and subsequent charge-offs if appropriate.

 

As of September 30, 2017, the Company modified two commercial mortgage loans valued together at $1.0 million that are considered TDRs. We modified the terms to interest only for a two-year period. These loans are paying according to their modified terms and are classified as substandard and impaired at September 30, 2018.

 

The following table presents interest income recognized on impaired loans for the three months ended September 30, 2018 and 2017:

 

   September 30, 
   2018   2017 
   (Unaudited) 
   (In thousands) 
Mortgage loans on real estate - commercial  $10   $14 
Commercial and industrial loans   -    - 
Total  $10   $14 

 

The following table presents interest income recognized on impaired loans for the nine months ended September 30, 2018 and 2017:

 

   September 30, 
   2018   2017 
   (Unaudited) 
   (In thousands) 
Mortgage loans on real estate - commercial  $29   $40 
Commercial and industrial loans   -    - 
Total  $29   $40 

 

 20 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three MONTHS ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

4.LOANS (Continued)

 

The following tables summarize the activity in the allowance for loan losses for the three months ended September 30, 2018 and 2017.

 

   For the three months ended September 30, 2018 (Unaudited) 
   (In thousands) 
   Mortgage Loans on
Real Estate
   Commercial and
Industrial Loans
   Consumer Loans   Unallocated   Total 
Allowance for loan losses:                         
Beginning balance  $867   $127   $5   $243   $1,242 
Charge-offs   -    (8)   -    -    (8)
Recoveries   -    -    -    -    - 
Provision   73    11    3    (87)   - 
Ending balance  $940   $130   $8   $156   $1,234 

 

   For the three months ended September 30, 2017 (Unaudited) 
   (In thousands) 
   Mortgage Loans on
Real Estate
   Commercial and
Industrial Loans
   Consumer Loans   Unallocated   Total 
Allowance for loan losses:                         
Beginning balance  $922   $92   $5   $116   $1,135 
Charge-offs   -    -    -    -    - 
Recoveries   13    3    -    -    16 
Provision   (52)   (1)   1    112    60 
Ending balance  $883   $94   $6   $228   $1,211 

 

The following tables summarize the activity in the allowance for loan losses for the nine months ended September 30, 2018 and 2017.

 

   For the nine months ended September 30, 2018 (Unaudited) 
   (In thousands) 
   Mortgage Loans
on Real Estate
   Commercial and
Industrial Loans
   Consumer Loans   Unallocated   Total 
Allowance for loan losses:                         
Beginning balance  $870   $116   $5   $250   $1,241 
Charge-offs   -    (8)   (9)   -    (17)
Recoveries   -    -    -    -    - 
Provision   70    22    12    (94)   10 
Ending balance  $940   $130   $8   $156   $1,234 

 

   For the nine months ended September 31, 2017 (Unaudited) 
   (In thousands) 
   Mortgage Loans on
Real Estate
   Commercial and
Industrial Loans
   Consumer Loans   Unallocated   Total 
Allowance for loan losses:                         
Beginning balance  $862   $180   $5   $123   $1,170 
Charge-offs   (64)   (61)   -    -    (125)
Recoveries   13    3    -    -    16 
Provision   72    (28)   1    105    150 
Ending balance  $883   $94   $6   $228   $1,211 

 

 21 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

5.COMPREHENSIVE INCOME (LOSS)

 

The balances and changes in the components of accumulated other comprehensive loss, net of tax, are as follows:

 

   For the three months ended September 30, 2018 
   Unrealized Gains and
Losses on Available-for-
Sale Securities
   Unrealized Gains
and Losses on
Pension Plan
   Total 
   (In thousands) 
             
Beginning Balance  $(508)  $(3,114)  $(3,622)
                
Other comprehensive income (loss)   (13)   -    (13)
                
Ending Balance  $(521)  $(3,114)  $(3,635)

 

   For the three months ended September 30, 2017 
   Unrealized Gains and
Losses on Available-for-
Sale Securities
   Unrealized Gains
and Losses on
Pension Plan
   Total 
   (In thousands) 
             
Beginning Balance  $(75)  $(2,276)  $(2,351)
                
Other comprehensive income (loss)   (10)   130    120 
                
Ending Balance  $(85)  $(2,146)  $(2,231)

 

   For the nine months ended September 30, 2018 
   Unrealized Gains and
Losses on Available-for-
Sale Securities
   Unrealized Gains
and Losses on
Pension Plan
   Total 
   (In thousands) 
             
Beginning Balance  $(206)  $(3,114)  $(3,320)
                
Other comprehensive income (loss)   (315)   -    (315)
                
Ending Balance  $(521)  $(3,114)  $(3,635)

 

   For the nine months ended September 30, 2017 
   Unrealized Gains and
Losses on Available-for-
Sale Securities
   Unrealized Gains
and Losses on
Pension Plan
   Total 
   (In thousands) 
             
Beginning Balance  $(273)  $(2,514)  $(2,787)
                
Other comprehensive income (loss)   188    368    556 
                
Ending Balance  $(85)  $(2,146)  $(2,231)

 

 22 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

6.FAIR VALUE MEASUREMENT and FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Management uses its best judgment in estimating the fair value of the Company’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of assets and liabilities subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

 

Accounting guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

 

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

 23 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

6.FAIR VALUE MEASUREMENT and FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows:

 

   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Available-for-Sale Securities:                    
                     
September 30, 2018 (Unaudited):                    
Municipal securities  $9,607   $-   $9,607   $- 
Mortgage-backed securities and collateralized mortgage obligations   11,182    -    11,182    - 
Corporate securities   5,854    -    5,854    - 
   $26,643   $-   $26,643   $- 
                     
December 31, 2017:                    
Municipal securities  $9,038   $-   $9,038   $- 
Mortgage-backed securities and collateralized mortgage obligations   10,216    -    10,216    - 
Corporate securities   2,843    -    2,843    - 
   $22,097   $-   $22,097   $- 

 

There were no securities transferred out of level 2 securities available-for-sale during the nine months ended September 30, 2018 or the year ended December 31, 2017.

 

Required disclosures include fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate, and estimates of future cash flows. In that regard, the fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. FASB ASU Topic 820 fair value measurements and disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

 

Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of certain of the Company’s assets and liabilities at September 30, 2018 and December 31, 2017.

 

 24 

 

 

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

6.FAIR VALUE MEASUREMENT and FAIR VALUE OF FINANCIAL INSTRUMENTs (Continued)

 

Cash and due from banks

 

The carrying amounts of these assets approximate their fair values.

 

Investment Securities

 

The fair value of securities available-for-sale (carried at fair value) are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted prices and is a Level 2 measurement.

 

Investment in FHLBNY Stock

 

The carrying value of FHLBNY stock approximates its fair value based on the redemption provisions of the FHLBNY stock, resulting in a Level 2 classification.

 

Loans

 

The fair values of loans held in portfolio are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans, resulting in a Level 3 classification. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments, and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

 

Accrued Interest Receivable and Payable and Advances from Borrowers for Taxes and Insurance

 

The carrying amount approximates fair value.

 

Deposits

 

The fair values disclosed for demand deposits (e.g., NOW accounts, non-interest checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts), resulting in a Level 1 classification. The carrying amounts for variable-rate certificates of deposit approximate their fair values at the reporting date, resulting in a Level 1 classification. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

 

Advances and borrowings from FHLBNY

 

The fair values of FHLBNY long-term borrowings are estimated using discounted cash flow analyses, based on the quoted rates for new FHLBNY advances with similar credit risk characteristics, terms and remaining maturity, resulting in a Level 2 classification.

 

 25 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

6.FAIR VALUE MEASUREMENT and FAIR VALUE OF FINANCIAL INSTRUMENTs (Continued)

 

The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2018 and December 31, 2017 are as follows:

 

   Fair Value  Carrying   Fair 
   Hierarchy  Amount   Value 
   (In thousands)
September 30, 2018 (Unaudited):             
Financial assets:             
Cash and due from banks  Level 1   4,302    4,302 
Securities available-for-sale  Level 2   26,643    26,643 
Investment in FHLB stock  Level 2   2,809    2,809 
Loans, net  Level 3   151,256    149,429 
Accrued interest receivable  Level 1   783    783 
Financial liabilities:             
Deposits  Level 1/2   135,579    132,137 
Advances and borrowings from FHLB  Level 2   33,250    33,250 
Advances from borrowers for taxes and insurance  Level 1   1,015    1,015 
              
December 31, 2017:             
Financial assets:             
Cash and due from banks  Level 1   4,375    4,375 
Securities available-for-sale  Level 2   22,097    22,097 
Investment in FHLB stock  Level 2   2,340    2,340 
Loans, net  Level 3   141,150    139,178 
Accrued interest receivable  Level 1   666    666 
Financial liabilities:             
Deposits  Level 1/2   129,596    127,610 
Advances and borrowings from FHLB  Level 2   24,500    24,500 
Accrued interest payable  Level 1   62    62 
Advances from borrowers for taxes and insurance  Level 1   1,957    1,957 

 

 26 

 

   

consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

6.FAIR VALUE MEASUREMENT and FAIR VALUE OF FINANCIAL INSTRUMENTs (Continued)

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

In addition to disclosure of the fair value of assets on a recurring basis, ASC Topic 820 requires disclosures for assets and liabilities measured at fair value on a nonrecurring basis, such as impaired assets and foreclosed real estate. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated as required by ASC Topic 310, “Receivables- Loan Impairment” when establishing the allowance for loan losses. Impaired loans are those in which the Company has measured impairment generally based on the fair value of the loan's collateral less estimated selling costs. Fair value of real estate collateral is generally determined based upon independent third-party appraisals of the properties, which consider sales prices of similar properties in the proximate vicinity or by discounting expected cash flows from the properties by an appropriate risk adjusted discount rate. Management may adjust the appraised values as deemed appropriate. Fair values of collateral other than real estate is based on an estimate of the liquidation proceeds. Impaired loans and foreclosed real estate are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the asset balances net of a valuation allowance.

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2018 and December 31, 2017 were as follows:

 

   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
September 30, 2018:                    
Impaired loans  $716   $-   $-   $716 
                     
December 31, 2017:                    
Impaired loans  $311   $-   $-   $311 

 

 27 

 

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

  

6. FAIR VALUE MEASUREMENT and FAIR VALUE OF FINANCIAL INSTRUMENTs (Continued)

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value:

 

Quantitative Information about
Level 3 Fair Value Measurements
Valuation Unobservable
Techniques Input Adjustment
               
Impaired loans Lower of Appraisal
appraisal of adjustments 10 %
collateral or Discounted cash flow analysis
asking price less
selling costs Costs to sell 10 %
                 
Foreclosed real estate Market Costs to sell 10 %
valuation
of property

 

 

At September 30, 2018, the fair value consists of impaired loan balances of $781,000, net of valuation allowance of $64,000 and at December 31, 2017, the fair value consists of loan balances of $318,000, net of a valuation allowance $7,000.

 

At September 30, 2018 and December 31, 2017, there was no foreclosed real estate.

 

Once a loan is foreclosed, the fair value of the real estate continues to be evaluated based upon the market value of the repossessed real estate originally securing the loan. At September 30, 2018 and December 31, 2017, there was no foreclosed real estate whose carrying value was written down utilizing Level 3 inputs.

 

The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $373,000 and $257,000 at September 30, 2018 and December 31, 2017, respectively.

 

 28 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of September 30, 2018 (unaudited) and December 31, 2017 and THE
three and nine months ended september 30, 2018 and 2017 (unaudited)

  

7.OFF-BALANCE SHEET CREDIT RISK

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit, market, and interest rate risk more than the amounts recognized in the consolidated statements of financial condition.

 

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

 

As of the dates indicated, the following financial instruments were outstanding whose contract amounts represent credit risk:

 

Commitments to extend credit are agreements to lend to a customer if there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company, is based on management's credit evaluation of the customer.

 

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
   (In thousands) 
         
Commitments to Grant Loans  $2,012   $1,489 
           
Unfunded Commitments Under Lines of Credit  $5,363   $4,020 

 

 29 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of september 30, 2018 (unaudited) and December 31, 2017 and THE
three and nine months ended september 30, 2018 and 2017 (unaudited)

  

8.REGULATORY CAPITAL REQUIREMENTS

 

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators, which if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

 

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

 

The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios set forth in the table below of total, Tier 1, and Tier 1 common equity capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of September 30, 2018, that the Bank met all capital adequacy requirements to which it is subject.

 

The Basel III rules limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier I capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. For 2018, the capital conservation buffer requirement is 1.875% of risk-weighted assets.

 

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion.  A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.  The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%.  A financial institution can elect to be subject to this new definition.

 

As of September 30, 2018, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk- based, Tier 1 risk-based, Tier 1 common equity risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios as of September 30, 2018 and December 31, 2017 are as follows:

 

 30 

 

  

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of september 30, 2018 (unaudited) and December 31, 2017 and THE
three and nine months ended september 30, 2018 and 2017 (unaudited)

 

8.REGULATORY CAPITAL REQUIREMENTS (continued)

  

   Actual   Minimum Capital
Requirement
   Minimum to be Well
Capitalized Under Prompt
and Corrective Action
Provisions
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (In thousands) 
                         
As of September 30, 2018 (Unaudited):                              
Total core capital to risk weighted assets  $20,771    17.54%  $9,475    8.00%  $11,843    10.00%
Tier 1 capital to risk weighted assets   19,537    16.50%   7,106    6.00%   9,475    8.00%
Tier 1 common equity to risk weighted assets   19,537    16.50%   5,329    4.50%   7,698    6.50%
Tier 1 capital to assets   19,537    10.41%   7,508    4.00%   9,385    5.00%
                               
As of December 31, 2017:                              
Total core capital to risk weighted assets  $20,154    18.53%  $8,700    8.00%  $10,875    10.00%
Tier 1 capital to risk weighted assets   18,913    17.39%   6,525    6.00%   8,700    8.00%
Tier 1 common equity to risk weighted assets   18,913    17.39%   4,894    4.50%   7,068    6.50%
Tier 1 capital to assets   18,913    10.70%   7,071    4.00%   8,838    5.00%

 

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SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

9.EMPLOYEE BENEFIT PLANS

 

Supplemental Executive Retirement Plan (SERP)

Beginning in 2016, the Bank established a SERP for its executive officers. All benefits provided under the SERP are unfunded and, as the executive officers retire, the Company will make a payment to the participant. At September 30, 2018 and December 31, 2017, the Company recorded $75,000 and $50,000, respectively for the SERP in other liabilities. For the three months ended September 30, 2018 and 2017, the expense included in employee benefits for the SERP totaled $8,000 for both periods. For the nine months ended September 30, 2018 and 2017, the expenses included in employee benefits for the SERP totaled $25,000 for both periods.

 

Defined Benefit Plan

The Company provides pension benefits for eligible employees through a noncontributory defined benefit pension plan. Substantially all employees participate in the retirement plan on a noncontributing basis and are fully vested after five years of service.

 

The following tables present the components of the net periodic pension plan cost for the Company’s Defined Benefit Pension Plan (the “Pension Plan”) for the periods indicated:

 

   For the three months
ended September 30,
2018
   For the three months
ended September 30,
2017
 
   (In thousands) 
Service cost  $84   $63 
Interest cost   103    106 
Expected return on assets   (197)   (177)
Amortization of unrecognized loss   54    51 
Net periodic pension cost  $44   $43 

 

   For the nine months
ended September 30,
2018
   For the nine months
ended September 30,
2017
 
   (In thousands) 
Service cost  $251   $189 
Interest cost   309    317 
Expected return on assets   (589)   (528)
Amortization of unrecognized loss   161    152 
Net periodic pension cost  $132   $130 

 

The benefit obligation activity for the Pension Plan was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.

 

The Company will assess the need for future annual contributions to the Pension Plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. A contribution of $1,000,000 was made to the pension plan during the nine months ended September 30, 2018.

 

Employee stock ownership plan (“ESOP”)

 

Effective upon the completion of the Company's initial public stock offering in October 2017, the Bank established an Employee Stock Ownership Plan (“ESOP”) for all eligible employees. The ESOP used $775,740 in proceeds from a term loan obtained from the Company to purchase 77,574 shares of common stock in the initial public offering at a price of $10.00 per share. The ESOP loan will be repaid principally from the Bank's contribution to the ESOP in annual payments through 2047 based on the prime rate of interest on the first business day each year. Shares are released to participants on a straight-line basis over the loan term and allocated based on participant compensation. The Bank recognizes compensation benefit expense as shares are committed for release at their current market price. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated shares would be recorded as a reduction of retained earnings and dividends on unallocated shares would be recorded as a reduction of debt. The Company recognized $6,000 and $20,000 of compensation expense related to this plan for the three months and nine months ended September 30, 2018, respectively. At December 31, 2017, there were 76,993 shares not yet released having an aggregate market value of approximately $751,000. Participant vesting provisions for the ESOP are 20% per year and will be fully vested upon completion of six years of credited service. Eligible employees who were employed with the Bank shall receive credit for vesting purposes for each year of continuous employment prior to adoption of the ESOP.

 

 32 

 

 

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of september 30, 2018 (unaudited) and December 31, 2017 and THE
three and nine months ended september 30, 2018 and 2017 (unaudited)

 

10.EARNINGS PER SHARE COMMON

 

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Net income available to common stockholders is net income to the Company. The Company has not granted any restricted stock awards or stock options and, during the nine months ended September 30, 2018 and 2017, had no potentially dilutive common stock equivalents. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released.

 

The following tables set forth the calculation of basic earnings per share.

 

   Three months ended September 30, 
(In thousands of dollars except per share data)  2018   2017 
         
Basic earnings per common share:          
Net income available to common stockholders  $213   $206 
Weighted average common shares outstanding   1,902,590            N/A 
   $0.11    N/A 

 

   Nine months ended September 30, 
(In thousands of dollars except per share data)  2018   2017 
         
Basic earnings per common share:          
Net income available to common stockholders  $573   $463 
Weighted average common shares outstanding   1,903,874           N/A 
   $0.30    N/A 

 

 33 

 

 

 SENECA FINANCIAL CORP. AND SUBSIDIARIES
Notes to the consolidated Financial Statements
as of SEPTEMBER 30, 2018 (unaudited) and December 31, 2017 and THE
three and NINE months ended SEPTEMBER 30, 2018 and 2017 (unaudited)

 

11.NON-INTEREST INCOME

 

During the nine months ended September 30, 2018, the Company adopted the amendments of ASU 2014-09 – Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has included the following tables regarding the Company's non-interest income for the periods presented.

 

   For the three months ended September 30, 
   2018   2017 
   (In thousands) 
Service fees          
Deposit related fees  $9   $9 
Loan servicing income   21    16 
Total service fees   30    25 
Fee income          
Securities commission income   47    35 
Insurance commission income   3    2 
Total insurance and securities commission income   50    37 
Card income          
Debit card interchange fee income   21    17 
ATM fees   3    3 
Insufficient fund fees   21    17 
Total card and insufficient funds income   45    37 
Realized gain on sale of residential mortgage loans and available-for-sale securities          
Realized gain on sales of residential mortgage loans   11    49 
Realized gain on available-for-sale securities   -    - 
Total gain on sale of loans and securities   11    49 
Bank owned life insurance   14    14 
Other miscellaneous income   6    6 
Total non-interest income  $156   $168 

 

   For the nine months ended September 30, 
   2018   2017 
(In thousands)  (In thousands) 
Service fees          
Deposit related fees  $37   $36 
Loan servicing income   62    45 
Total service fees   99    81 
Fee income          
Securities commission income   129    106 
Insurance commission income   11    - 
Total insurance and securities commission income   140    106 
Card income          
Debit card interchange fee income   60    50 
ATM fees   7    6 
Insufficient fund fees   49    47 
Total card and insufficient funds income   116    103 
Realized gain on sale of residential mortgage loans and available-for-sale securities          
Realized gain on sales of residential mortgage loans   18    122 
Realized gain on available-for-sale securities   -    1 
Total gain on sale of loans and securities   18    123 
Bank owned life insurance   42    46 
Other miscellaneous income   19    21 
Total non-interest income  $434   $480 

 

The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. The following is a discussion of key revenues within the scope of the new revenue guidance:

 

·Service fees – Revenue from fees on deposit accounts is earned at the time that the charge is assessed to the customer's account. Fee waivers are discretionary and usually reversed within the same reporting period as assessed.
·Fee income – Fee income is earned through commissions and is satisfied over the time which the fee has been assessed.
·Card income and insufficient funds fees – Card income consists of interchange fees from consumer debit card networks and other card related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur. Insufficient funds fees are satisfied at the time the charge is assessed to the customer's account.
·Realized gains on sale of residential mortgage loans and available-for-sale securities are realized at the time the transaction occurs.

 

 34 

 

 

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

 

Statement Regarding Forward-Looking Statements

 

Certain statements contained herein are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

 

  · Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;
  · Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
  · Competition in our primary market areas;
  · Changes in interest rates and national or regional economic conditions;
  · Costs of expanding our branch network;
  · Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
  · Significant government regulations, legislation, and potential changes thereto;
  · A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;
  · Increased cost of operations due to greater regulatory oversight, supervision, and examination of banks and bank holding companies, and higher deposit insurance premiums;
  · Limitations on our ability to expand consumer product and service offerings due to potential stricter consumer protection laws and regulations; and
  · Other risks described herein and in the other reports and statements we file with the SEC.

 

The Company disclaims any obligation to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect future events or developments.

 

Overview

 

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets (primarily cash and due from banks), and the interest we pay on our interest-bearing liabilities, consisting primarily of demand accounts, NOW accounts, savings accounts, money market accounts, certificate of deposit accounts and borrowings. Our results of operations also are affected by non-interest income, our provision for loan losses and non-interest expense. Non-interest income consists primarily of fee income and service charges, income from our financial services division, earnings on bank owned life insurance and realized gains on sales of loans and securities. Non-interest expenses consist primarily of compensation and employee benefits, core processing, premises and equipment, professional fees, postage and office supplies, FDIC premiums, advertising, and other expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. For the three months ended September 30, 2018, we had net income of $213,000 compared to net income of $206,000 for the three months ended September 30, 2017. The period over period $4,000 increase in net income was due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by an increase in non-interest expense and a decrease in non-interest income. For the nine months ended September 30, 2018, we had net income of $573,000 compared to net income of $463,000 for the nine months ended September 30, 2017. The period over period $110,000 increase in net income was due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by an increase in non-interest expense and a decrease in non-interest income.

 

At September 30, 2018, we had $192.7 million in consolidated assets, an increase of $16.5 million, or 9.4%, from $176.2 million at December 31, 2017. During the first nine months of 2018, we continued to focus on loan production, particularly with respect to commercial and industrial loans as well as residential real estate loans.

 

The Bank is in the process of getting local municipal approvals to open a new branch office location in Bridgeport, New York. Subject to the receipt of such approvals, the Bank expects to open the branch in the spring of 2019. Management does anticipate an increase in non-interest expense in connection with the opening of this branch location for compensation, furniture fixture and equipment, data processing and depreciation etc.

 

 35 

 

 

Summary of Significant Accounting Policies

 

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

 

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

 

The following represent our significant accounting policies:

 

Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the date of the statement of condition and it is recorded as a reduction of loans. The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan and the entire allowance is available to absorb all loan losses.

 

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan are lower than the carrying value of that loan.

 

The general component covers pools of loans, by loan class, including commercial loans not considered impaired, as well as smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based on historical loss rates for each of these categories of loans, which are adjusted for qualitative factors. The qualitative factors include:

 

  · Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;

 

  · National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans;

 

  · Nature and volume of the portfolio and terms of the loans;

 

  · Experience, ability and depth of the lending management and staff;

 

  · Volume and severity of past due, classified, and non-accrual loans, as well as other loan modifications; and

 

  · Quality of our loan review system and the degree of oversight by our board of directors.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss analysis and calculation.

 

 36 

 

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

In addition, various regulatory agencies periodically review the allowance for loan losses. As a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is the responsibility of Seneca Savings and any increase or decrease in the allowance is the responsibility of management.

 

Income Taxes. Income taxes are provided for the tax effects of certain transactions reported in the consolidated financial statements. Income taxes consist of taxes currently due plus deferred taxes related primarily to temporary differences between the financial reporting and income tax basis of the allowance for loan losses, premises and equipment, certain state tax credits, and deferred loan origination costs. The deferred tax assets and liabilities represent the future tax return consequences of the temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

Estimation of Fair Values. Fair values for securities available-for-sale are obtained from an independent third-party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management generally makes no adjustments to the fair value quotes provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.

 

Pension Plans. Seneca Savings sponsors a qualified defined benefit pension plan. The qualified defined benefit pension plan is funded with trust assets invested in a diversified portfolio of debt and equity securities. Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, we make extensive use of assumptions about inflation, investment returns, mortality, turnover, and discount rates. We have established a process by which management reviews and selects these assumptions annually. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plan could have an adverse impact on our cash flow.  Changes in the key actuarial plan assumptions would impact net periodic benefit expense and the projected benefit obligation for our defined benefit pension plan.

 

Change in Accounting Estimate. Due to a change in New York State tax law, mortgage recording tax expenses is a refundable tax credit, at the election of the tax payer. Under New York law, a bank that paid special additional mortgage recording tax (“SAMRT”) on residential mortgages in most New York counties any year beginning on or before January 1, 2015, may elect to treat the unused portion of the SAMRT credit on those mortgages as overpayment of tax to be carried forward or refunded. Previously, any unused credit was only eligible to be carried forward to future years. The Bank made this election on July 1, 2018 and its impact is immaterial.

 

Average balances and yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.

 

 37 

 

 

   For the Three Months Ended September 30, 
   2018   2017 
   Average
Outstanding
Balance
   Interest   Yield/
Rate(5)
   Average
Outstanding
Balance
   Interest   Yield/
Rate(5)
 
   (Dollars in thousands) 
                         
Interest-earning assets:                              
                               
Loans (1)  $149,182   $1,740    4.67%  $139,296   $1,581    4.54%
Available-for-sale securities   27,538    164    2.38%   22,386    102    1.82%
FHLB Stock   2,651    46    6.94%   2,139    28    5.24%
Other interest-earning assets   1,545    8    2.07%   1,184    6    2.03%
Total interest-earning assets  $180,916   $1,958    4.33%   165,005   $1,717    4.16%
Noninterest-earning assets   7,212              8,087           
Total assets  $188,128             $173,092           
                               
Interest-bearing liabilities:                              
                               
NOW accounts  $14,649   $7    0.19%  $12,260   $5    0.16%
Regular savings and demand club accounts   21,683    4    0.07%   23,111    4    0.07%
Money market accounts   13,067    18    0.55%   13,176    19    0.58%
Certificates of deposit and retirement accounts   72,204    290    1.61%   73,097    240    1.31%
Total interest-bearing deposits   121,603    319    1.05%   121,644    268    0.88%
FHLB Borrowings   30,857    168    2.18%   22,764    118    2.07%
Total interest-bearing liabilities   152,460   $487    1.28%   144,408   $386    1.07%
Noninterest-bearing deposits   17,017              16,879           
Other non-interest bearing liabilities   462              632           
Total liabilities   169,939              161,919           
Stockholders’ Equity   18,189              11,173           
Total liabilities and stockholders' equity  $188,128             $173,092           
                               
Net interest income       $1,471             $1,331      
Net interest rate spread (2)             3.05%             3.09%
Net interest-earning assets (3)  $28,456             $20,597           
Net interest margin (4)             3.25%             3.23%
Average interest-earning assets to average interest-bearing liabilities   119%             114%          

 

 

  (1) Includes loans held for sale.
  (2) Interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
  (3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
  (4) Net interest margin represents net interest income divided by total interest-earning assets.
  (5) Annualized.

 

 38 

 

 

   For the Nine Months Ended September 30, 
   2018   2017 
   Average
Outstanding
Balance
   Interest   Yield/
Rate(5)
   Average
Outstanding
Balance
   Interest   Yield/
Rate(5)
 
   (Dollars in thousands) 
                         
Interest-earning assets:                              
                               
Loans (1)  $145,895   $5,065    4.63%  $136,891   $4,627    4.51%
Available-for-sale securities   26,261    441    2.24%   21,183    307    1.93%
FHLB Stock   2,511    122    6.48%   2,076    74    4.75%
Other interest-earning assets   2,051    27    1.76%   1,519    14    1.23%
Total interest-earning assets   176,718   $5,655    4.27%   161,669   $5,022    4.14%
Noninterest-earning assets   7,465              7,156           
Total assets  $184,183             $168,825           
                               
Interest-bearing liabilities:                              
                               
NOW accounts  $13,528   $18    0.18%  $11,935   $13    0.15%
Regular savings and demand club accounts   21,453    10    0.06%   23,274    11    0.06%
Money market accounts   13,634    57    0.56%   14,116    60    0.57%
Certificates of deposit and retirement accounts   72,283    814    1.50%   68,732    634    1.23%
Total interest-bearing deposits   120,898    898    0.99%   118,057    718    0.81%
FHLB Borrowings   28,575    450    2.10%   24,117    329    1.82%
Total interest-bearing liabilities   149,473   $1,348    1.20%   142,174   $1,047    0.98%
Noninterest-bearing deposits   16,137              15,098           
Other non-interest bearing liabilities   368              517           
Total liabilities    165,978              157,789           
Stockholders' equity   18,205              11,036           
Total liabilities and stockholders’ equity  $184,183             $168,825           
                               
Net interest income       $4,307             $3,975      
Net interest rate spread (2)             3.06%             3.16%
Net interest-earning assets (3)  $27,245             $19,495           
Net interest margin (4)             3.25%             3.28%
Average interest-earning assets to average interest-bearing liabilities   118%             114%          

 

 

  (1) Includes loans held for sale.
  (2) Interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
  (3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
  (4) Net interest margin represents net interest income divided by total interest-earning assets.
  (5) Annualized.

 

 39 

 

 

 Rate/Volume Analysis

 

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018 vs. 2017   2018 vs. 2017 
   Increase (Decrease) Due
to
   Total
Increase
   Increase (Decrease) Due
to
   Total
Increase
 
   Volume   Rate   (Decrease)   Volume   Rate   (Decrease) 
   (In thousands) 
                         
Interest-earning assets:                              
Loans (1)  $112   $47   $159   $135   $303   $438 
Available-for-sale securities   23    39    62    33    101    134 
FHLB Stock   7    11    18    7    41    48 
Other interest-earning assets   2    -    2    2    11    13 
                               
Total interest-earning assets  $144   $97   $241   $177   $456   $633 
                               
Interest-bearing liabilities:                              
NOW accounts  $1   $1   $2    -   $5   $5 
Regular savings and demand club accounts   -    -    -    -    (1)   (1)
Money market accounts   -    (1)   (1)   1    (4)   (3)
Certificates of deposit and retirement accounts   (3)   53    50    (1)   180    180 
Total deposits   (2)   53    51    -    180    181 
                               
FHLB Borrowings   42    8    50    8    113    121 
                               
Total interest-bearing liabilities   40    61    101    8    293    302 
                               
Change in net interest income  $104   $36   $140   $169   $163   $331 

 

 

  (1) Includes loans held for sale.

 

 40 

 

 

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

 

Total assets increased $16.5 million, or 9.4%, to $192.7 million at September 30, 2018 from $176.2 million at December 31, 2017. The increase was primarily due to increases in loans and securities available-for-sale.

 

Loans increased $10.1 million, or 7.2%, to $151.3 million at September 30, 2018 from $141.2 million at December 31, 2017, reflecting increases in residential loans and commercial and industrial loans. One- to four-family residential real estate mortgage loans increased $5.0 million, or 5.3%, to $100.7 million at September 30, 2018 from $95.7 million at December 31, 2017. In addition, commercial and industrial loans increased $4.7 million, or 56.5%, to $13.0 million at September 30, 2018 from $8.3 million at December 31, 2017. The Bank acquired sixteen commercial and industrial loans totaling $2.4 million originated by an unrelated financial institution in the third quarter. The Bank owns 100% of the loans and retains no recourse. The loans are located outside the Bank’s market area and have maturities of one to five years. Commercial real estate loans increased $1.7 million, or 7.7%, to $23.3 million at September 30, 2018 from $21.7 million at December 31, 2017. In the first nine months of 2018, we increased our portfolio of commercial and industrial loans, commercial real estate and residential mortgages to increase earnings.

 

Securities available-for-sale increased by $4.5 million, or 20.6%, to $26.6 million at September 30, 2018 from $22.1 million at December 31, 2017. The increase was primarily due to purchases of $7.0 million in new securities, partially offset by principal repayments of $2.5 million. The new purchases included six corporate floating rate bonds totaling $3.0 million, two FNMA pools totaling $2.1 million, one FHLMC pool totaling $1.1 million, and two bank qualified municipal securities totaling $842,000.

 

Cash and due from banks decreased $73,000 to $4.3 million at September 30, 2018 from $4.4 million at December 31, 2017 due to investment in securities and loans.

 

Total deposits increased $6.0 million, or 4.6%, to $135.6 million at September 30, 2018 from $129.6 million at December 31, 2017. The increase was primarily due to an increase in NOW accounts, which increased $2.0 million, or 16.0%, to $14.9 million at September 30, 2018 from $12.9 million at December 31, 2017. This increase was primarily due to special advertising promotions targeting transaction accounts during the first nine months of 2018.

 

Total borrowings from the FHLBNY increased $8.8 million, or 35.7%, to $33.3 million at September 30, 2018 from $24.5 million at December 31, 2017 as we increased borrowings to fund loan growth.

 

Total stockholders’ equity increased $278,000, or 1.5%, to $18.7 million at September 30, 2018 from $18.4 million at December 31, 2017. The increase was primarily due to net income of $573,000 and a decrease of unearned ESOP shares of $20,000 partially offset by the increase in accumulated other comprehensive loss of $315,000 due to the increase in interest rates for the nine months ended September 30, 2018.

 

 41 

 

 

Comparison of Operating Results for the Three Months Ended September 30, 2018 and 2017

 

General. Net income increased $4,000, or 1.9%, to $213,000 for the three months ended September 30, 2018, from $206,000 for the three months ended September 30, 2017. The increase was due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income, and an increase in non-interest expense.

 

Interest Income. Interest income increased $241,000, or 14.0%, to $2.0 million for the three months ended September 30, 2018, from $1.7 million for the three months ended September 30, 2017. Our average balance of interest-earning assets increased $15.9 million, or 9.6%, to $180.9 million for the three months ended September 30, 2018 from $165.0 million for the three months ended September 30, 2017 due primarily to increases in the average balance of loans and available-for-sale securities. The average yield on interest-earning assets increased 17 basis points to 4.33% for the three months ended September 30, 2018 from 4.16% for the three months ended September 30, 2017 as our interest-earning assets repriced with the rising interest rate environment.

 

Interest income on loans increased $159,000, or 10.1%, to $1.7 million for the three months ended September 30, 2018 from $1.6 million for the three months ended September 30, 2017 due to the increase in the average balance of loans and the increase in the average yield on loans. Our average balance of loans increased $9.9 million, or 7.1%, to $149.2 million for the three months ended September 30, 2018 from $139.3 million for the three months ended September 30, 2017. The increase in the average balance of loans resulted from our continued emphasis on growing our one- to four-family residential real estate portfolio and our recent increased focus on commercial lending. The Bank purchased sixteen commercial and industrial loans totaling $2.4 million from an unrelated financial institution. The loan yield in the 5% range and were purchase in the third quarter. Our average yield on loans increased 13 basis points to 4.67% for the three months ended September 30, 2018 from 4.54% for the three months ended September 30, 2017, as our adjustable rate loans repriced with the rising interest rate environment and we received pre-payment penalties on several commercial real estate loans.

 

Interest income on available-for-sale securities increased $62,000, or 60.8%, to $164,000 for the three months ended September 30, 2018 from $102,000 for the three months ended September 30, 2017 due primarily to increases in the average yield of available-for-sale securities and the average balance of available-for- sale securities. The average yield we earned on available-for-sale securities increased 56 basis points to 2.38% for the three months ended September 30, 2018 from 1.82% for the three months ended September 30, 2017 primarily as a result of lower premium amortization resulting from slower prepayment speeds on mortgage-backed securities and the repricing of floating rate securities to the three-month LIBOR in a rising rate environment. The average balance of available-for-sale securities increased $5.2 million, or 23.0%, to $27.5 million for the three months ended September 30, 2018 from $22.4 million for the three months ended September 30, 2017. The increase in available-for-sale securities was due in part to the purchase of floating rate corporate bonds to hedge against a rising interest rate environment.

 

Interest Expense. Interest expense increased $101,000, or 26.2%, to $487,000 for the three months ended September 30, 2018 from $386,000 for the three months ended September 30, 2017, due to increases in interest expense on deposits and borrowings. Our average balance of interest-bearing liabilities increased $8.1 million, or 5.6%, to $152.5 million for the three months ended September 30, 2018 from $144.4 million for the three months ended September 30, 2017 due primarily to an increase in the average balance of FHLBNY borrowings. Our average rate on interest-bearing liabilities increased 21 basis points to 1.28% for the three months ended September 30, 2018 from 1.07% for the three months ended September 30, 2017 primarily as a result of increases in the average rate on FHLBNY borrowings and certificates of deposit.

 

Interest expense on deposits increased $51,000, or 19.1%, to $319,000 for the three months ended September 30, 2018 from $268,000 for the three months ended September 30, 2017 due to an increase in the average rate paid on deposits. The average rate paid on deposits increased to 1.05% for the three months ended September 30, 2018 from 0.88% for the three months ended September 30, 2017, primarily reflecting higher rates paid on promotional certificates of deposit and CDARS certificates of deposit. The average rate of certificates of deposit increased by 29 basis points to 1.61% for the three months ended September 30, 2018 from 1.31% for the three months ended September 30, 2017. Partially offsetting the increase in the average rate of certificates of deposit, the average balance of certificates of deposit decreased by $893,000 to $72.2 million for the three months ended September 30, 2018 from $73.1 million for the three months ended September 30, 2017.

 

Interest expense on borrowings increased $50,000, or 42.4%, to $168,000 for the three months ended September 30, 2018 from $118,000 for the three months ended September 30, 2017. The increase in interest expense on borrowings reflected the increase in the average rate of FHLBNY borrowings which increased by 11 basis points to 2.18% for the three months ended September 30, 2018 from 2.07% for the three months ended September 30, 2017. The average balance of borrowings with the FHLBNY increased in the third quarter of 2018 as compared to the third quarter of 2017 by $8.1 million from $22.8 million to $30.9 million in order to fund our asset growth. The average rate on borrowings increased due to the increase in short-term interest rates.

 

Net Interest Income. Net interest income increased $140,000, or 10.5%, to $1.5 million for the three months ended September 30, 2018 from $1.3 million for the three months ended September 30, 2017, primarily as a result of the growth in net interest-earning assets which increased $7.9 million, or 38.2%, from $20.6 million for the three months ended September 30, 2017 to $28.5 million for the three months ended September 30, 2018. Our net interest rate spread decreased by five basis points to 3.05% for the three months ended September 30, 2018 from 3.09% for the three months ended September 30, 2017, and our net interest margin increased by three basis points to 3.25% for the three months ended September 30, 2018 from 3.23% for the three months ended September 30, 2017, primarily due to an increase in rate of adjustable commercial loans and the origination of higher rate commercial loans.

 

 42 

 

 

Provision for Loan Losses. We establish a provision for loan losses which is charged to operations to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses to maintain the allowance.

 

Based on our evaluation of the above factors, we did not record a provision for loan losses for the three months ended September 30, 2018 compared to a $60,000 provision for loan losses for the three months ended September 30, 2017. The decrease in the provision for the three months ended September 30, 2018 was the result of improving asset delinquency trends. We experienced net charge-offs of $8,000 for the three months ended September 30, 2018. There were no charge-offs in the third quarter of 2017. The allowance for loan losses was $1.2 million, or 0.82% of net loans outstanding, at September 30, 2018, $1.2 million, or 0.88% of net loans outstanding, at December 31, 2017 and $1.2 million, or 0.86% of net loans outstanding, at September 30, 2017.

 

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate for the three months ended September 30, 2018 and September 30, 2017. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

 

Non-Interest Income. Non-interest income decreased $12,000, or 8.8%, to $156,000 for the three months ended September 30, 2018 from $168,000 for the three months ended September 30, 2017. The decrease was primarily due to a decrease in net gains on sale of residential mortgage loans offset by an increase in financial services income and fee income. Net gain on the sale of residential mortgage loans decreased $38,000, to $11,000 for the three months ended September 30, 2018 from $49,000 for the three months ended September 30, 2017. Financial services income increased $13,000, or 35.1%, to $50,000 for the three months ended September 30, 2018 from $37,000 for the three months ended September 30, 2017. Fee income increased $10,000 or 24.4%, to $50,000 for the three months ended September 30, 2018 from $37,000 for the three months ended September 30, 2017. The decrease in gains on sale of residential mortgage loans sold was due to lower loan volume in the third quarter of 2018. The increase in income from financial services was due to the increase in assets under management. Fee income increased because of our promotions targeting transaction accounts in the third quarter of 2018.

 

Non-Interest Expense. Non-interest expense increased by $188,000, or 16.0%, to $1.4 million for the three months ended September 30, 2018 from $1.2 million for the three months ended September 30, 2017. The increase was primarily due to an increase in compensation and employee benefits as well as core processing expenses. Compensation and employee benefits increased $145,000, or 22.9%, to $779,000 for the three months ended September 30, 2018 from $634,000 for the three months ended September 30, 2017 because of additional personnel. Core processing expenses increased $24,000, or 13.3%, to $205,000 for the three months ended September 30, 2018 from $181,000 for the three months ended September 30, 2017. The increase in core processing expenses was due to the addition of several products and services offered to our customers such as business banking on-line, ACH origination and 24-hour call center service. Professional fees increased $8,000, or 15.4%, to $60,000 for the three months ended September 30, 2018 from $52,000 for the three months ended September 30, 2017. Professional fees increased due to audit, accounting and legal fees in 2018 as a result of being a public company. FDIC insurance premiums decreased $18,000 or 58.1%, due to the additional capital raised in 2017. Mortgage recording was accounted for as a receivable in the third quarter with the expectation of receiving reimbursement from the state of New York. The amounts was immaterial for the three months ended September 30, 2018.

 

Income Tax Expense. We incurred income tax expense of $48,000 and $55,000 for the three months ended September 30, 2018 and 2017, respectively, resulting in effective rates of 18.4% and 20.8%, respectively. The decrease in income tax expense for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 was primarily due to a change in tax law for 2018 which reduced the corporate federal income tax rate from 34% to 21% and slightly less income before provision for income taxes.

 

 43 

 

 

Comparison of Operating Results for the Nine Months Ended September 30, 2018 and 2017

 

General. Net income increased $110,000, or 23.8%, to $573,000 for the nine months ended September 30, 2018, from $463,000 for the nine months ended September 30, 2017. The increase was due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income, and an increase in non-interest expense.

 

Interest Income. Interest income increased $633,000, or 12.6%, to $5.7 million for the nine months ended September 30, 2018, from $5.0 million for the nine months ended September 30, 2017. Our average balance of interest-earning assets increased $15.0 million, or 9.3%, to $176.7 million for the nine months ended September 30, 2018 from $161.7 million for the nine months ended September 30, 2017 due primarily to increases in the average balance of loans and investment securities. The average yield on interest-earning assets increased nine basis points to 4.27% for the nine months ended September 30, 2018 from 4.14% for the nine months ended September 30, 2017 as our interest-earning assets repriced with the rising interest rate environment.

 

Interest income on loans increased $438,000, or 9.5%, to $5.1 million for the nine months ended September 30, 2018 from $4.6 million for the nine months ended September 30, 2017 due to the increase in the average balance of loans and the increase in the average yield on loans. Our average balance of loans increased $9.0 million, or 6.6%, to $145.9 million for the nine months ended September 30, 2018 from $136.9 million for the nine months ended September 30, 2017. The increase in the average balance of loans resulted from our continued emphasis on growing our one- to four-family residential real estate portfolio and our recent increased focus on commercial lending. The Bank purchased sixteen commercial and industrial loans totaling $2.4 million from an unrelated financial institution. The loan yield in the 5% range and were purchase in the third quarter. Our average yield on loans increased 12 basis points to 4.63% for the nine months ended September 30, 2018 from 4.51% for the nine months ended September 30, 2017, as our adjustable rate loans repriced with the rising interest rate environment.

 

Interest income on available-for-sale securities increased $134,000, or 43.6%, to $441,000 for the nine months ended September 30, 2018 from $307,000 for the nine months ended September 30, 2017 due primarily to increases in the average yield of available-for-sale securities and the average balance of available-for- sale securities. The average yield we earned on available-for-sale securities increased 31 basis points to 2.24% for the nine months ended September 30, 2018 from 1.93% for the nine months ended September 30, 2017 primarily as a result of lower premium amortization resulting from slower prepayment speeds on mortgage-backed securities and the repricing of floating rate securities to the three-month LIBOR in a rising rate environment. The average balance of available-for-sale securities increased $5.1 million, or 24.0%, to $26.3 million for the nine months ended September 30, 2018 from $21.2 million for the nine months ended September 30, 2017. The increase in available-for-sale securities was due in part to the purchase of floating rate corporate bonds to hedge against a rising interest rate environment.

 

Interest Expense. Interest expense increased $302,000, or 28.8%, to $1.3 million for the nine months ended September 30, 2018 from $1.0 million for the nine months ended September 30, 2017, due to increases in interest expense on deposits and borrowings. Our average balance of interest-bearing liabilities increased $7.3 million, or 5.1%, to $149.5 million for the nine months ended September 30, 2018 from $142.2 million for the nine months ended September 30, 2017 due primarily to increases in the average balance of certificates of deposit and FHLBNY borrowings. Our average rate on interest-bearing liabilities increased 22 basis points to 1.20% for the nine months ended September 30, 2018 from 0.98% for the nine months ended September 30, 2017 primarily as a result of increases in the average rate on FHLBNY borrowings and certificates of deposit.

 

Interest expense on deposits increased $180,000, or 25.1%, to $898,000 for the nine months ended September 30, 2018 from $718,000 for the nine months ended September 30, 2017 due to increases in the average rate paid on deposits and the average balance of deposits. The average rate paid on deposits increased to 0.99% for the nine months ended September 30, 2018 from 0.81% for the nine months ended September 30, 2017, primarily reflecting higher rates paid on promotional certificates of deposit and CDARS certificates of deposit and FHLB borrowings. The average rate of certificates of deposit increased by 27 basis points to 1.50% for the nine months ended September 30, 2018 from 1.23% for the nine months ended September 30, 2017. In addition, the average balance of certificates of deposit increased by $3.6 million to $72.3 million for the nine months ended September 30, 2018 from $68.7 million for the nine months ended September 30, 2017, which reflected the majority of the growth in the average balance of deposits.

 

Interest expense on borrowings increased $121,000, or 36.8%, to $450,000 for the nine months ended September 30, 2018 from $329,000 for the nine months ended September 30, 2017. The increase in interest expense on borrowings reflected the increase in the average rate of FHLBNY borrowings which increased by 28 basis points to 2.10% for the nine months ended September 30, 2018 from 1.82% for the nine months ended September 30, 2017. The average balance of borrowings with the FHLBNY increased in the first nine months of 2018 as compared to the first nine months of 2017 by $4.6 million from $24.1 million to $28.6 million in order to fund our asset growth. The average rate on borrowings increased due to the increase in short-term interest rates.

 

Net Interest Income. Net interest income increased $332,000, or 8.4%, to $4.3 million for the nine months ended September 30, 2018 from $4.0 million for the nine months ended September 30, 2017, primarily as a result of the growth in net interest-earning assets which increased $7.8 million or 39.8%, from $19.5 million for the nine months ended September 30, 2017 to $27.2 million for the nine months ended September 30, 2018. Our net interest rate spread decreased by 10 basis points to 3.06% for the nine months ended September 30, 2018 from 3.16% for the nine months ended September 30, 2017, and our net interest margin decreased by three basis points to 3.25% for the nine months ended September 30, 2018 from 3.28% for the nine months ended September 30, 2017.

 

 44 

 

 

Provision for Loan Losses. We establish a provision for loan losses which is charged to operations to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses to maintain the allowance.

 

Based on our evaluation of the above factors, we recorded a provision for loan losses for the nine months ended September 30, 2018 of $10,000 as compared to a $150,000 provision for loan losses for the nine months ended September 30, 2017. The decrease in the provision for the nine months ended September 30, 2018 was the result of increased asset quality and improving asset delinquency trends. Our one-to-four residential loans past-due ninety days or more decreased by $53,000 or 7.5%, from $706,000 to $653,000, for the three months ended September 30, 2018. Our one-to-four residential loans past due ninety days or more decreased $524,000 or 44.5%, for the nine months ended September 30, 2018. We experienced net charge-offs of $17,000 for the nine months ended September 30, 2018 as compared to net charge-offs of $125,000 for the same period in 2017. The allowance for loan losses was $1.2 million, or 0.82% of net loans outstanding, at September 30, 2018, $1.2 million, or 0.88% of net loans outstanding, at December 31, 2017 and $1.2 million, or 0.86% of net loans outstanding, at September 30, 2017.

 

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate for the nine months ended September 30, 2018 and September 30, 2017. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

 

Non-Interest Income. Non-interest income decreased $46,000, or 9.6%, to $434,000 for the nine months ended September 30, 2018 from $480,000 for the nine months ended September 30, 2017. The decrease was primarily due to a decrease in net gains on sale of residential mortgage loans offset by an increase in financial services income and fee income. Net gain on the sale of residential mortgage loans decreased 85.2%, to $18,000 for the nine months ended September 30, 2018 from $122,000 for the nine months ended September 30, 2017. Financial services income increased $34,000, or 32.1%, to $140,000 for the nine months ended September 30, 2018 from $106,000 for the nine months ended September 30, 2017. Fee income increased $16,000, or 13.4%, to $135,000 for the nine months ended September 30, 2018 from $119,000 for the nine months ended September 30, 2017. The decrease in gains on sale of residential mortgage loans sold was due to lower loan volume in the first nine months of 2018. The increase in income from financial services was due to the increase in assets under management. Fee income increased because of our promotions targeting transaction accounts in the first nine months of 2018.

 

Non-Interest Expense. Non-interest expense increased by $318,000, or 8.5%, to $4.0 million for the nine months ended September 30, 2018 from $3.7 million for the nine months ended September 30, 2017. The increase was primarily due to an increase in compensation and employee benefits as well as core processing expenses. Compensation and employee benefits increased $291,000, or 14.8%, to $2.3 million for the nine months ended September 30, 2018 from $2.0 million for the nine months ended September 30, 2017 because of additional personnel. Core processing expenses increased $111,000, or 22.9%, to $595,000 for the nine months ended September 30, 2018 from $484,000 for the nine months ended September 30, 2017. The increase in core processing expenses was due to the addition of several products and services offered to our customers such as business banking on-line, ACH origination and 24-hour call center service. Professional fees decreased $83,000, or 28.8%, to $205,000 for the nine months ended September 30, 2018 from $288,000 for the nine months ended September 30, 2017. Professional fees decreased due to lower audit and accounting fees in 2018 and the hiring of an internal auditor. FDIC insurance premiums decreased $64,000, or 71.9%, due to the additional capital raised in 2017.

 

Income Tax Expense. We incurred income tax expense of $116,000 and $118,000 for the nine months ended September 30, 2018 and 2017, respectively, resulting in effective rates of 16.8% and 20.3%, respectively. The decrease in income tax expense for the nine months ended September 30, 2018 as compared to the same period in 2017 was primarily due to a change in tax law for 2018, which reduced the corporate federal income tax rate from 34% to 21%.

 

 45 

 

 

Non-Performing Assets

 

We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and non-accruing troubled debt restructurings. Non-performing assets, including non-performing loans, totaled $653,000, or 0.34% of total assets, at September 30, 2018 and $1.2 million, or 0.67% of total assets, at December 31, 2017. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. We had no non-accruing troubled debt restructurings at the dates indicated

 

   At September 30, 2018   At December 31, 2017 
   (Dollars in thousands) 
         
Non-accrual loans:          
Residential:          
One- to four-family  $653   $1,177 
Home equity loans and lines of credit   -      - 
Construction   -      - 
Commercial real estate   -      - 
Commercial and industrial   -      - 
Consumer and other   -      - 
  Total non-accrual loans  $653   $1,177 
           
Accruing loans 90 days or more past due:          
Residential:          
One- to four-family   -      - 
Home equity loans and lines of credit   -      - 
Construction   -      - 
Commercial real estate   -      - 
Commercial and industrial   -      - 
Consumer and other   -      - 
  Total accruing loans 90 days or more past due  $-     $- 
Total non-performing loans   653    1,177 
Real estate owned   -    - 
Total non-performing assets  $653   $1,177 
           
Total non-performing loans to total loans   0.43%   0.83%
Total non-performing loans to total assets   0.34%   0.67%
Total non-performing assets to total assets   0.34%   0.67%

 

 46 

 

 

The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

   At or for the Nine Months Ended September 30, 
   2018   2017 
   (Dollars in thousands) 
         
Balance at beginning of period  $1,241   $1,170 
           
Charge-offs:          
Residential:          
One- to four-family   -    52 
Home equity loans and lines of credit   -    - 
Construction   -    - 
Commercial real estate   -    12 
Commercial and industrial   8    61 
Consumer and other   9    - 
  Total charge-offs   17    125 
           
Recoveries:          
Residential:          
One- to four-family   -    13 
Home equity loans and lines of credit   -    - 
Construction   -    - 
Commercial real estate   -    3 
Commercial and industrial   -    - 
Consumer and other   -    - 
  Total recoveries   -    16 
           
Net charge-offs   17    109 
Provision for loan losses   10    150 
           
Balance at end of period  $1,234   $1,211 
           
Ratios:          
Net charge-offs to average loans outstanding   0.01%   0.08%
Allowance for loan losses to non-performing loans at end of period   188.97%   152.71%
Allowance for loan losses to total loans at end of period   0.87%   0.86%

 

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Liquidity and Capital Resources

 

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from calls, maturities, and sales of securities. We also have the ability to borrow from the FHLBNY. At September 30, 2018, we had a $78.8 million line of credit with the FHLBNY and a $2.5 million line of credit with Zions Bank. At September 30, 2018, we had $23.8 million in outstanding borrowings from the FHLBNY. We have not borrowed against the line of credit with Zions Bank during the nine months ended September 30, 2018.

 

The Board and Directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2018.

 

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which includes cash and due from banks. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At September 30, 2018, cash and due from banks totaled $4.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $26.6 million at September 30, 2018.

 

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year at September 30, 2018, totaled $40.6 million, or 30.0%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

At September 30, 2018, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at September 30, 2018. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2018, we had outstanding commitments to originate loans of $2.0 million. We anticipate that we will have sufficient funds available to meet our current lending commitments.

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

 

Impact of Inflation and Changing Price

 

The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information relating to this item.

 

Item 4 – Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

As of September 30, 2018, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material effect on the financial condition or results of operations of the Company.

 

Item 1A – Risk Factors

 

A smaller reporting company is not required to provide the information relating to this item.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3 – Defaults Upon Senior Securities

 

None

 

Item 4 – Mine Safety Disclosures

 

Not applicable

 

Item 5 – Other Information

 

None

 

Item 6 – Exhibits

 

Exhibit
No.
  Description
     
31.1   Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2   Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
32   Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
101   The following materials from Seneca Financial Corp. Form 10-Q for the three and nine months ended September 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Financial Condition (iii) the Consolidated Statements of Comprehensive Income (loss), (iv) the Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related notes

 

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SIGNATURES

 

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.

 

  SENECA FINANCIAL CORP.
  (registrant)
   
November 14, 2018 /s/ Joseph G. Vitale
  Joseph G. Vitale
  President and Chief Executive Officer
   
November 14, 2018 /s/ Vincent J. Fazio
  Vincent J. Fazio
  Executive Vice President and Chief Financial Officer

  

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