UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x

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

 

For the quarterly period ended June 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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	¨ (Do not check if a smaller reporting company)
		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 August 10, 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 June 30, 2018 (Unaudited) and December 31, 2017		3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)		4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)		5
	Consolidated Statements of Stockholder’s Equity for the Six Months Ended June 30, 2018 and 2017 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Six Months Ended June 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

 

 

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)

 

		June 30, 2018				December 31, 2017
		(Unaudited)
ASSETS
Cash and due from banks		$	3,430			$	4,375
Securities, available-for-sale			26,947				22,097
Loans, net of allowance for loan losses of $1,242 (6/30/18) and $1,241 (12/31/17)			145,398				141,150
Federal Home Loan Bank of New York stock, at cost			2,631				2,340
Interest receivable			654				666
Premises and equipment, net			2,540				2,626
Bank owned life insurance			2,409				2,381
Other assets			1,237				539
Total assets		$	185,246			$	176,174
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing		$	12,157			$	11,357
Interest bearing			120,648				118,239
Total Deposits			132,805				129,596
Short term Federal Home Loan Bank advances			8,000				4,100
Long term Federal Home Loan Bank advances			21,750				20,400
Advances from borrowers for taxes and insurance			2,607				1,957
Pension liability			54				55
Other liabilities			1,506				1,664
Total liabilities			166,722				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 June 30, 2018 and December 31, 2017			9				9
Additional paid-in capital			7,846				7,846
Retained earnings			14,997				14,637
Unearned ESOP shares, at cost			(757	)			(770	)
Accumulated other comprehensive loss			(3,571	)			(3,320	)
Total stockholders' equity			18,524				18,402
Total liabilities and stockholders' equity		$	185,246			$	176,174

 

The accompanying notes are an integral part of these statements.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands except per share data)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
INTEREST INCOME
Loans, including fees		$	1,724			$	1,548			$	3,325			$	3,046
Securities			188				131				353				251
Other			7				5				19				8
Total interest income			1,919				1,684				3,697				3,305
INTEREST EXPENSE
Deposits			303				250				579				450
Advances and borrowings			144				107				282				211
Total interest expense			447				357				861				661
Net interest income			1,472				1,327				2,836				2,644
PROVISION FOR LOAN LOSSES			-				50				10				90
Net interest income after provision for loan losses			1,472				1,277				2,826				2,554
NON-INTEREST INCOME
Service fees			31				42				69				56
Income from financial services			38				32				90				69
Fee income			49				24				84				78
Earnings on bank-owned life insurance			14				15				28				32
Net gains on sale of residential mortgage loans			6				55				7				73
Net gains on sales of available-for-sale securities			-				-				-				1
Gain on sale of foreclosed real estate			-				-				-				3
Total non-interest income			138				168				278				312
NON-INTEREST EXPENSE
Compensation and employee benefits			756				675				1,472				1,326
Core processing			199				153				390				303
Premises and equipment			123				101				235				207
Professional fees			73				139				145				236
Postage & Office Supplies			27				39				59				67
FDIC premiums			10				33				12				58
Advertising			67				57				99				86
Mortgage recording tax			17				29				26				44
Other			112				103				238				219
Total non-interest expense			1,384				1,329				2,676				2,546
Income before provision for income taxes			226				116				428				320
PROVISION FOR INCOME TAXES			33				23				68				63
Net income		$	193			$	93			$	360			$	257
Net income per common shares - basic and diluted		$	0.10				N/A			$	0.19				N/A
Weighted average number of shares outstanding - basic and diluted			1,902,261				N/A				1,902,585				N/A

 

The accompanying notes are an integral part of these statements.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
NET INCOME		$	193			$	93			$	360			$	257
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Unrealized gains on available-for-sale securities:
Unrealized holding (loss) gains arising during period			(18	)			237				(318	)			300
Reclassification adjustment for net gains included in net income			-				-				-				(1	)
Net unrealized (loss) gains on available-for-sale securities			(18	)			237				(318	)			299
Defined benefit pension plan:
Net gains (losses) arising during the period			-				-				-				-
Reclassification of amortization of net losses recognized in net periodic pension cost			-				-				-				-
Net changes in defined benefit pension plan			-				-				-				-
OTHER COMPREHENSIVE INCOME, BEFORE TAX			(18	)			237				(318	)			299
Tax effect			(4	)			79				(67	)			101
OTHER COMPREHENSIVE INCOME, NET OF TAX			(14	)			158				(251	)			198
TOTAL COMPREHENSIVE INCOME		$	179			$	251			$	109			$	455

 

The accompanying notes are an integral part of these statements.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands except per share data)

 

																		Accumulated
						Additional								Unearned				Other				Total
		Common				Paid-In				Retained				ESOP				Comprehensive				Stockholders'
		Stock				Capital				Earnings				Shares				Loss				Equity
BALANCE, JANUARY 1, 2018		$	9			$	7,846			$	14,637			$	(770	)		$	(3,320	)		$	18,402
Net income			-				-				360				-				-				360
Other comprehensive loss			-				-				-				-				(251	)			(251	)
ESOP shares committed to be released			-				-				-				13				-				13
BALANCE, JUNE 30, 2018		$	9			$	7,846			$	14,997			$	(757	)		$	(3,571	)		$	18,524
BALANCE, JANUARY 1, 2017			-				-				13,567				-				(2,787	)		$	10,780
Net income			-				-				257				-				-				257
Other comprehensive income			-				-				-				-				198				198
BALANCE, JUNE 30, 2017		$	-			$	-			$	13,824			$	-			$	(2,589	)		$	11,235

 

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

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

		Six Months Ended June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	360			$	257
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation and amortization			100				80
Provision for loan losses			10				90
Net amortization of premiums and discounts on securities			135				132
Gain on sale of residential mortgage loans			(7	)			(73	)
Proceeds from sale of residential mortgage loans held for sale			1,780				4,826
Origination of residential mortgage loans held for sale			(1,780	)			(4,753	)
Gain on sale of foreclosed assets			-				(3	)
Gain on sale of available-for-sale securities			-				(1	)
Amortization of deferred loan fees			13				8
ESOP compensation expense			13				-
Earnings on investment in bank owned life insurance			(28	)			(32	)
Decrease (Increase) in accrued interest receivable			12				(14	)
Increase in other assets			(698	)			(1,257	)
Change in deferred income tax benefit			67				-
(Decrease) Increase in other liabilities			(151	)			975
Net cash flow (used in) provided by operating activities			(160	)			235
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in securities available-for-sale
Proceeds from calls and maturities			-				825
Proceeds from sales			-				1,224
Principal repayments			1,236				898
Purchases			(6,538	)			(5,962	)
Purchases of Federal Home Loan Bank of New York stock			(762	)			(666	)
Redemptions of Federal Home Loan Bank of New York stock			470				684
Loan originations and principal collections, net			(4,272	)			(6,240	)
Proceeds from sales of foreclosed assets			-				330
Purchases or premises and equipment			(14	)			(26	)
Net cash flow used in investing activities			(9,894	)			(8,933	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits			3,209				15,353
Increase in advances from borrowers for taxes and insurance			650				478
Proceeds from long-term advances			2,350				4,000
Payments of long-term advances			(1,000	)			(500	)
Increase (decrease) in FHLB advances			3,900				(10,000	)
Net cash flow provided by financing activities			9,109				9,331
Net change in cash and cash equivalents			(945	)			633
CASH AND CASH EQUIVALENTS - beginning of period			4,375				1,762
CASH AND CASH EQUIVALENTS - end of period		$	3,430			$	2,395
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest on deposits and borrowed funds		$	870			$	636
Income taxes		$	38			$	2
Transfer of loans to other real estate owned		$	-			$	451

 

The accompanying notes are an integral part of these statements.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of June 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 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 six months ended June 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.

 

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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of June 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 similar to 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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. 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. 2018-09, Codification Improvements to address stakeholder suggestions for minor corrections and clarifications within the codification. The transition and effective date guidance is 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.

 

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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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:
June 30, 2018 (Unaudited):
Municipal securities		$	9,922			$	1			$	(235	)		$	9,688
Mortgage-backed securities and collateralized mortgage obligations			12,248				-				(331	)			11,917
Corporate securities			5,356				14				(28	)			5,342
		$	27,526			$	15			$	(594	)		$	26,947
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 $10.9 million and $9.2 million were pledged to secure advances and for other purposes required or permitted by law for the six months ended June 30, 2018 and for the year ended December 31, 2017, respectively.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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.

 

		June 30, 2018
		(Unaudited)								December 31, 2017
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Due in one year or less		$	-			$	-			$	-			$	-
Due after one year through five years			2,797				2,788				783				783
Due after five years through ten years			7,205				7,135				6,523				6,512
Due after ten years			5,275				5,106				4,674				4,586
Mortgage-backed securities and collateralized mortgage obligations			12,249				11,918				10,378				10,216
		$	27,526			$	26,947			$	22,358			$	22,097

 

During the six months ended June 30, 2018 the Company did not sell any securities. During the six months ended June 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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)
June 30, 2018 (Unaudited):
Municipal securities		$	(72	)		$	3,932			$	(163	)		$	4,706
Mortgage-backed securities and collateralized mortgage obligations			(86	)			5,518				(245	)			5,963
Corporate Securities			(28	)			3,523				-				-
		$	(186	)		$	12,973			$	(408	)		$	10,669
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 six months ended June 30, 2018, the Company did not record an other-than-temporary impairment charge.

 

At June 30, 2018, thirteen municipal securities and nine mortgage-backed securities and collateralized mortgage obligations were in a continuous loss position for more than twelve months. At June 30, 2018, thirteen municipal securities, nine mortgage-backed securities and collateralized mortgage obligations and seven 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. 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 30, 2018 and 2017 (unaudited)

 

4.

LOANS

 

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

 

		June 30,				December 31,
		2018				2017
		(Unaudited)
		(In thousands)
Mortgage loans on real estate:
One-to-four family first lien residential		$	98,517			$	95,697
Residential construction			5,210				5,978
Home equity loans and lines of credit			7,662				7,706
Commercial			21,541				21,673
Total mortgage loans on real estate		$	132,930			$	131,054
Commercial and industrial			10,842				8,312
Consumer loans			2,331				2,443
Total loans			146,103				141,809
Allowance for credit losses			(1,242	)			(1,241	)
Net deferred loan origination costs			537				582
Net loans		$	145,398			$	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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 91% of the portfolio at June 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of June 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018 and December 31, 2017. There were no doubtful accounts at June 30, 2018 or December 31, 2017.

 

		June 30, 2018 (Unaudited)
		(In thousands)
		Pass				Special Mention				Substandard				Loss				Total
Mortgage loans on real estate:
One-to-four family first lien residential		$	98,517			$	-			$	-			$	-			$	98,517
Residential construction			5,210				-				-				-				5,210
Home equity loans and lines of credit			7,662				-				-				-				7,662
Commercial			20,501				-				1,040				-				21,541
Total mortgage loans on real estate			131,890				-				1,040				-				132,930
Commercial and industrial			10,614				-				228								10,842
Consumer loans			2,331				-				-				-				2,331
Total loans		$	144,835			$	-			$	1,268			$	-			$	146,103

 

		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

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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:

 

		June 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		$	1,207			$	686			$	706			$	2,599			$	95,918			$	98,517
Residential construction			-				-				-				-				5,210				5,210
Home equity loans and lines of credit			17				-				-				17				7,645				7,662
Commercial			163				119				-				282				21,259				21,541
Total mortgage loans on real estate			1,387				805				706				2,898				130,032				132,930
Commercial and industrial			20				-				-				20				10,822				10,842
Consumer loans			-				-				-				-				2,331				2,331
Total loans		$	1,407			$	805			$	706			$	2,918			$	143,185			$	146,103

 

		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

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 30, 2018 and 2017 (unaudited)

 

4.

LOANS (Continued)

 

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

 

		June 30,				December 31,
		2018				2017
		(Unaudited)
		(In thousands)
Mortgage loans on real estate		$	706			$	1,177
Commercial and industrial loans			-				-
Consumer loans			-				-
Total nonaccrual loans		$	706			$	1,177

 

The following table summarizes impaired loan information by portfolio class:

 

		June 30, 2018 (Unaudited)
		(In thousands)
		Recorded Investment				Unpaid Principal Balance				Related Allowance
With an allowance recorded:
Mortgage loans on real estate		$	318			$	318			$	12
Commercial and industrial loans			-				-				-
			318				318				12
With no allowance recorded:
Mortgage loans on real estate			1,409				388				-
Commercial and industrial loans			-				-				-
			1,409				388				-
Total		$	1,727			$	706			$	12

 

		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

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 30, 2018 and 2017 (unaudited)

 

4.

LOANS (Continued)

 

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

 

		June 30,				December 31,
		2018				2017
		(Unaudited)
		(In thousands)
Mortgage loans on real estate		$	1,843			$	1,556
Commercial and industrial loans			-				177
Total		$	1,843			$	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 June 30, 2018, 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. There were no loans considered to be TDRs at June 30, 2017.

 

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

 

		June 30,
		2018				2017
		(Unaudited)
		(In thousands)
Mortgage loans on real estate - commercial		$	8			$	-
Commercial and industrial loans			-				4
Total		$	8			$	4

 

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

 

		June 30,
		2018				2017
		(Unaudited)
		(In thousands)
Mortgage loans on real estate - commercial		$	18			$	2
Commercial and industrial loans			-				9
Total		$	18			$	11

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three months ended june 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 June 30, 2018 and 2017.

 

		For the three months ended June 30, 2018 (Unaudited)
		(In thousands)
		Mortgage Loans on Real Estate				Commercial and Industrial Loans				Consumer Loans				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	881			$	129			$	3			$	238			$	1,251
Charge-offs			-				-				(9	)			-				(9	)
Recoveries			-				-				-				-				-
Provision			(14	)			(2	)			11				5				-
Ending balance		$	867			$	127			$	5			$	243			$	1,242

 

		For the three months ended June 30, 2017 (Unaudited)
		(In thousands)
		Mortgage Loans on Real Estate				Commercial and Industrial Loans				Consumer Loans				Unallocated				Total
Allowance for loan losses:
Beginning balance		$	863			$	90			$	4			$	128			$	1,085
Charge-offs			-				-				-				-				-
Recoveries			-				-				-				-				-
Provision			75				2				1				(28	)			50
Ending balance		$	938			$	92			$	5			$	100			$	1,135

 

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

 

		For the six months ended June 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			-				-				(9	)			-				(9	)
Recoveries			-				-				-				-				-
Provision			(3	)			11				9				(7	)			10
Ending balance		$	867			$	127			$	5			$	243			$	1,242

 

		For the six months ended June 30, 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			-				-				-				-				-
Provision			140				(27	)			-				(23	)			90
Ending balance		$	938			$	92			$	5			$	100			$	1,135

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018
		Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Gains and Losses on Pension Plan				Total
		(In thousands)
Beginning Balance		$	(443	)		$	(3,114	)		$	(3,557	)
Other comprehensive income (loss)			(14	)			-				(14	)
Ending Balance		$	(457	)		$	(3,114	)		$	(3,571	)

 

		For the three months ended June 30, 2017
		Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Gains and Losses on Pension Plan				Total
		(In thousands)
Beginning Balance		$	(232	)		$	(2,514	)		$	(2,746	)
Other comprehensive income (loss)			157				-				157
Ending Balance		$	(75	)		$	(2,514	)		$	(2,589	)

 

		For the six months ended June 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)			(251	)			-				(251	)
Ending Balance		$	(457	)		$	(3,114	)		$	(3,571	)

 

		For the six months ended June 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)			198				-				198
Ending Balance		$	(75	)		$	(2,514	)		$	(2,589	)

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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:
June 30, 2018 (Unaudited):
Municipal securities		$	9,688			$	-			$	9,688			$	-
Mortgage-backed securities and collateralized mortgage obligations			11,917				-				11,917				-
Corporate securities			5,342				-				5,342				-
		$	26,947			$	-			$	26,947			$	-
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 six months ended June 30, 2018 and 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 June 30, 2018 and December 31, 2017.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018 and December 31, 2017 are as follows:

 

		Fair Value		Carrying				Fair
		Hierarchy		Amount				Value
		(In thousands)
June 30, 2018 (Unaudited):
Financial assets:
Cash and due from banks		Level 1		$	3,430			$	3,430
Securities available-for-sale		Level 2			26,947				26,947
Investment in FHLB stock		Level 2			2,631				2,631
Loans, net		Level 3			145,398				142,874
Accrued interest receivable		Level 1			654				654
Financial liabilities:
Deposits		Level 1/2			132,805				128,732
Advances and borrowings from FHLB		Level 2			29,750				29,750
Advances from borrowers for taxes and insurance		Level 1			2,607				2,607
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				138,178
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

 

 

consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018 and December 31, 2017 were as follows:

 

		Total				Level 1				Level 2				Level 3
		(In thousands)
June 30, 2018 (Unaudited):
Impaired loans		$	306			$	-			$	-			$	306
December 31, 2017:
Impaired loans		$	311			$	-			$	-			$	311

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of June 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018, the fair value consists of impaired loan balances of $318,000, net of valuation allowance of $12,000 and at December 31, 2017, the fair value consists of loan balances of $318,000, net of a valuation allowance $7,000.

 

At June 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 June 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 $474,000 and $257,000 at June 30, 2018 and December 31, 2017, respectively.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six ended june 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.

 

		June 30,				December 31,
		2018				2017
		(Unaudited)
		(In thousands)
Commitments to Grant Loans		$	1,679			$	1,489
Unfunded Commitments Under Lines of Credit		$	5,224			$	4,020

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 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 June 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 June 30, 2018 and December 31, 2017 are as follows:

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018 (Unaudited):
Total core capital to risk weighted assets		$	20,531				18.23	%		$	9,011				8.00	%		$	11,264				10.00	%
Tier 1 capital to risk weighted assets			19,290				17.12	%			6,759				6.00	%			9,011				8.00	%
Tier 1 common equity to risk weighted assets			19,290				17.12	%			5,069				4.50	%			7,322				6.50	%
Tier 1 capital to assets			19,290				10.49	%			7,359				4.00	%			9,198				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	%

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 June 30, 2018 and December 31, 2017, the Company recorded $67,000 and $50,000, respectively for the SERP in other liabilities. For the three months ended June 30, 2018 and 2017, the expense included in employee benefits for the SERP totaled $19,000 for both periods. For the six months ended June 30, 2018 and 2017, the expenses included in employee benefits for the SERP totaled $17,000 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 June 30, 2018				For the three months ended June 30, 2017
Service cost		$	83,750			$	62,990
Interest cost			103,075				105,776
Expected return on assets			(196,500	)			(176,280	)
Amortization of unrecognized loss			53,550				50,757
Net periodic pension cost		$	43,875			$	43,243

 

		For the six months ended June 30, 2018				For the six months ended June 30, 2017
Service cost		$	167,500			$	125,980
Interest cost			206,150				211,552
Expected return on assets			(393,000	)			(352,560	)
Amortization of unrecognized loss			107,100				101,514
Net periodic pension cost		$	87,750			$	86,486

 

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 $500,000 was made to the pension plan during the first three months of 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 $13,000 and $6,000 of compensation expense related to this plan for the six months and three months ended June 30, 2018, and 2017 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.

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 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 six months ended June 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 June 30,
(In thousands of dollars except per share data)		2018				2017
Basic earnings per common share:
Net income available to common stockholders		$	193			$	93
Weighted average common shares outstanding			1,902,261				N/A
		$	0.10				N/A

 

		Six months ended June 30,
(In thousands of dollars except per share data)		2018				2017
Basic earnings per common share:
Net income available to common stockholders		$	360			$	257
Weighted average common shares outstanding			1,902,585				N/A
		$	0.19				N/A

 

 

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of june 30, 2018 (unaudited) and December 31, 2017 and THE

three and six months ended june 30, 2018 and 2017 (unaudited)

 

11.	NON-INTEREST INCOME

 

During the six months ended June 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 June 30,
		2018				2017
(In thousands)
Service fees
Deposit related fees		$	10			$	11
Loan servicing income			21				15
Total service fees			31				26
Fee income
Securities commission income			34				28
Insurance commission income			4				4
Total insurance and securities commission income			38				32
Card income
Debit card interchange fee income			22				17
ATM fees			2				2
Insufficient fund fees			19				15
Total card and insufficient funds income			43				34
Realized gain on sale of residential mortgage loans and available-for-sale securities
Realized gain on sales of residential mortgage loans			6				55
Realized gain on available-for-sale securities			-				1
Total gain on sale of loans and securities			6				56
Bank owned life insurance			14				15
Other miscellaneous income			6				5
Total non-interest income		$	138			$	168

 

		For the six months ended June 30,
		2018				2017
(In thousands)
Service fees
Deposit related fees		$	28			$	27
Loan servicing income			41				29
Total service fees			69				56
Fee income
Securities commission income			82				70
Insurance commission income			8				(1	)
Total insurance and securities commission income			90				69
Card income
Debit card interchange fee income			39				33
ATM fees			4				3
Insufficient fund fees			28				30
Total card and insufficient funds income			71				66
Realized gain on sale of residential mortgage loans and available-for-sale securities
Realized gain on sales of residential mortgage loans			7				73
Realized gain on available-for-sale securities			-				1
Total gain on sale of loans and securities			7				74
Bank owned life insurance			28				32
Other miscellaneous income			13				15
Total non-interest income		$	278			$	312

 

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 gain on sale of residential mortgage loans and available-for-sale securities are realized at the time the transaction occurs.

 

 

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 anticipated 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 June 30, 2018, we had net income of $193,000 compared to net income of $93,000 for the three months ended June 30, 2017. The period over period $100,000 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 six months ended June 30, 2018, we had net income of $360,000 compared to net income of $257,000 for the six months ended June 30, 2017. The period over period $103,000 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 June 30, 2018, we had $185.2 million in consolidated assets, an increase of $9.0 million, or 5.1%, from $176.2 million at December 31, 2017. During the first six 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 excepts 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.

 

 

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.

 

 

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.

 

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, but 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.

 

 

		For the Three Months Ended June 30,
		2018												2017
		Average Outstanding Balance				Interest				Yield/ Rate				Average Outstanding Balance				Interest				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans (1)		$	146,047			$	1,724				4.72	%		$	136,631			$	1,548				4.53	%
Available-for-sale securities			27,129				152				2.24	%			21,308				105				1.97	%
FHLB Stock			2,459				36				5.86	%			1,982				26				5.25	%
Other interest-earning assets			1,774				7				1.58	%			1,800				5				1.11	%
Total interest-earning assets		$	177,409			$	1,919				4.33	%			161,721			$	1,684				4.17	%
Noninterest-earning assets			6,435												7,295
Total assets		$	183,844											$	169,016
Interest-bearing liabilities:
NOW accounts		$	13,644			$	6				0.18	%		$	12,201			$	4				0.13	%
Regular savings and demand club accounts			21,409				3				0.06	%			23,452				4				0.07	%
Money market accounts			14,392				21				0.58	%			13,961				19				0.54	%
Certificates of deposit and retirement accounts			72,517				273				1.51	%			71,586				223				1.25	%
Total interest-bearing deposits			121,962				303				0.99	%			121,200				250				0.83	%
FHLB Borrowings			26,673				144				2.16	%			21,704				107				1.97	%
Total interest-bearing liabilities			148,635			$	447				1.20	%			142,904			$	357				1.00	%
Noninterest-bearing deposits			16,689												14,798
Other non-interest bearing liabilities			338												494
Total liabilities			165,662												158,196
Stockholders' equity			18,182												10,820
Total liabilities and stockholders' equity		$	183,844											$	169,016
Net interest income						$	1,472											$	1,327
Net interest rate spread (2)											3.12	%											3.17	%
Net interest-earning assets (3)		$	28,774											$	18,817
Net interest margin (4)											3.32	%											3.28	%
Average interest-earning assets to average interest-bearing liabilities			119	%											113	%

 

	(1)	Includes loans held for sale.
	(2)	Interest rate spread represents the difference between the yield on average interest-earning assets and the 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.

 

 

		For the Six Months Ended June 30,
		2018												2017
		Average Outstanding Balance				Interest				Yield/ Rate				Average Outstanding Balance				Interest				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans (1)		$	144,253			$	3,325				4.61	%		$	135,689			$	3,046				4.49	%
Available-for-sale securities			25,622				277				2.16	%			20,582				195				1.89	%
FHLB Stock			2,441				76				6.23	%			2,044				56				5.48	%
Other interest-earning assets			2,303				19				1.65	%			1,686				8				0.95	%
Total interest-earning assets			174,619			$	3,697				4.23	%			160,001			$	3,305				4.13	%
Noninterest-earning assets			6,928												6,544
Total assets		$	181,547											$	166,545
Interest-bearing liabilities:
NOW accounts		$	12,359			$	11				0.18	%		$	11,773			$	8				0.14	%
Regular savings and demand club accounts			21,338				6				0.06	%			23,355				7				0.06	%
Money market accounts			13,875				39				0.56	%			14,585				41				0.56	%
Certificates of deposit and retirement accounts			72,322				524				1.45	%			66,550				394				1.18	%
Total interest-bearing deposits			119,894				579				0.97	%			116,263				450				0.77	%
FHLB Borrowings			27,435				282				2.06	%			24,793				211				1.70	%
Total interest-bearing liabilities			147,329			$	861				1.17	%			141,056			$	661				0.94	%
Noninterest-bearing deposits			15,697												14,208
Other non-interest bearing liabilities			321												459
Total liabilities			163,347												155,723
Stockholders' Equity			18,200												10,822
Total liabilities and stockholders' equity		$	181,547											$	166,545
Net interest income						$	2,836											$	2,644
Net interest rate spread (2)											3.07	%											3.19	%
Net interest-earning assets (3)		$	27,290											$	18,945
Net interest margin (4)											3.25	%											3.30	%
Average interest-earning assets to average interest-bearing liabilities			119	%											113	%

 

	(1)	Includes loans held for sale.
	(2)	Interest rate spread represents the difference between the yield on average interest-earning assets and the 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.

 

 

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 June 30,												Six Months Ended June 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)		$	107			$	69			$	176			$	192			$	87			$	279
Available-for-sale securities			28				20				47				48				34				82
FHLB Stock			6				4				10				11				9				20
Other interest-earning assets			-				2				2				3				8				11
Total interest-earning assets		$	141			$	95			$	235			$	254			$	137			$	392
Interest-bearing liabilities:
NOW accounts		$	-			$	2			$	2				-			$	3			$	3
Regular savings and demand club accounts			-				(1	)			(1	)			(1	)			(0	)			(1	)
Money market accounts			1				1				2				(2	)			(0	)			(2	)
Certificates of deposit and retirement accounts			3				48				50				34				96				129
Total deposits			4				50				53				32				97				129
FHLB Borrowings			24				13				37				22				49				71
Total interest-bearing liabilities			28				63				90				54				147				200
Change in net interest income		$	113			$	32			$	145			$	198			$	(8	)		$	192

 

(1)

Includes loans held for sale.

 

 

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

 

Total assets increased $9.0 million, or 5.1%, to $185.2 million at June 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 $4.2 million, or 3.0%, to $145.4 million at June 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 $2.8 million, or 2.9%, to $98.5 million at June 30, 2018 from $95.7 million at December 31, 2017. In addition, commercial and industrial loans increased $2.5 million, or 30.4%, to $10.8 million at June 30, 2018 from $8.3 million at December 31, 2017. Commercial real estate loans decreased $132,000, or 0.6%, to $21.5 million at June 30, 2018 from $21.7 million at December 31, 2017. In the first six months of 2018, we increased our portfolio of commercial and industrial loans and residential mortgages to increase earnings. Historically the first half of each year tends to be slower than the rest of the year for mortgage originations.

 

Securities available-for-sale increased by $4.8 million, or 21.7%, to $26.9 million at June 30, 2018 from $22.1 million at December 31, 2017. The increase was primarily due to purchases of $6.5 million in new securities, partially offset by principal repayments of $1.2 million. The new purchases included five corporate floating rate bonds totaling $2.5 million, two FNMA pools totaling $2.1 million, one FHLMC pools totaling $1.1 million, and two bank qualified municipal securities totaling $842,000.

 

Cash and due from banks decreased $1.0 million to $3.4 million at June 30, 2018 from $4.4 million at December 31, 2017 due to investment in securities and loans.

 

Total deposits increased $3.2 million, or 2.5%, to $132.8 million at June 30, 2018 from $129.6 million at December 31, 2017. The increase was primarily due to an increase in NOW accounts, which increased $2.4 million, or 18.6%, to $15.3 million at June 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 six months of 2018.

 

Total borrowings from the FHLBNY increased $5.3 million, or 21.6%, to $29.8 million at June 30, 2018 from $24.5 million at December 31, 2017 as we increased borrowings to fund loan growth.

 

Total stockholders’ equity increased $99,000, or 0.5% to $18.5 million at June 30, 2018 from $18.4 million at December 31, 2017. The increase was primarily due to net income of $360,000 and a decrease of unearned ESOP shares of $13,000 partially offset by the increase in accumulated other comprehensive loss of $251,000 for the six months ended June 30, 2018.

 

 

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

 

General. Net income increased $100,000, or 107.5%, to $193,000 for the three months ended June 30, 2018, from $93,000 for the three months ended June 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 $235,000, or 14.0%, to $1.9 million for the three months ended June 30, 2018, from $1.7 million for the three months ended June 30, 2017. Our average balance of interest-earning assets increased $15.7 million, or 9.7%, to $177.4 million for the three months ended June 30, 2018 from $161.7 million for the three months ended June 30, 2017 due primarily to an increase in the average balance of loans and available-for-sale securities. The average yield on interest-earning assets increased 16 basis points to 4.33% for the three months ended June 30, 2018 from 4.17% for the three months ended June 30, 2017 as our interest-earning assets repriced with the rising interest rate environment.

 

Interest income on loans increased $176,000, or 11.4%, to $1.7 million for the three months ended June 30, 2018 from $1.5 million for the three months ended June 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 $9.4 million, or 6.9%, to $146.0 million for the three months ended June 30, 2018 from $136.6 million for the three months ended June 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. Our average yield on loans increased 19 basis points to 4.72% for the three months ended June 30, 2018 from 4.53% for the three months ended June 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 $47,000, or 46.2%, to $152,000 for the three months ended June 30, 2018 from $105,000 for the three months ended June 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 27 basis points to 2.24% for the three months ended June 30, 2018 from 1.97% for the three months ended June 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 $5.8 million, or 27.2%, to $27.1 million for the three months ended June 30, 2018 from $21.3 million for the three months ended June 30, 2017.

 

Interest Expense. Interest expense increased $90,000, or 25.2%, to $447,000 for the three months ended June 30, 2018 from $357,000 for the three months ended June 30, 2017, due to increases in interest expense on deposits and borrowings. Our average balance of interest-bearing liabilities increased $5.7 million, or 4.0%, to $148.6 million for the three months ended June 30, 2018 from $142.9 million for the three months ended June 30, 2017 due primarily to increases in the average balances of NOW accounts and certificates of deposit. Our average rate on interest-bearing liabilities increased 20 basis points to 1.20% for the three months ended June 30, 2018 from 1.00% for the three months ended June 30, 2017 primarily as a result of increases in the average rate on FHLBNY borrowings and certificates of deposit.

 

Interest expense on deposits increased $53,000, or 21.2%, to $303,000 for the three months ended June 30, 2018 from $250,000 for the three months ended June 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 three months ended June 30, 2018 from 0.83% for the three months ended June 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 26 basis points to 1.51% for the three months ended June 30, 2018 from 1.25% for the three months ended June 30, 2017. In addition, the average balance of certificates of deposit increased by $900,000 to $72.5 million for the three months ended June 30, 2018 from $71.6 million for the three months ended June 30, 2017, and the average balance of NOW accounts increased by $1.4 million to $13.6 million for the three months ended June 30, 2018 from $12.2 million for the three months ended June 30, 2017 which reflected the majority of the growth in the average balance of deposits.

 

Interest expense on borrowings increased $37,000, or 34.6%, to $144,000 for the three months ended June 30, 2018 from $107,000 for the three months ended June 30, 2017. The increase in interest expense on borrowings reflected the increase in the average rate of FHLBNY borrowings which increased by 19 basis points to 2.16% for the three months ended June 30, 2018 from 1.97% for the three months ended June 30, 2017. The average balance of borrowings with the FHLBNY increased in the second quarter of 2018 as compared to the second quarter of 2017 by $5.0 million from $21.7 million to $26.7 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 $145,000, or 10.9%, to $1.5 million for the three months ended June 30, 2018 from $1.3 million for the three months ended June 30, 2017, primarily as a result of the growth in net interest-earning assets which increased $10.0 million or 52.9% from $18.8 million for the three months ended June 30, 2017 to $28.8 million for the three months ended June 30, 2018. Our net interest rate spread decreased by five basis points to 3.12% for the three months ended June 30, 2018 from 3.17% for the three months ended June 30, 2017, and our net interest margin increased by four basis points to 3.32% for the three months ended June 30, 2018 from 3.28% for the three months ended June 30, 2017, primarily due to several large pre-payment penalties on commercial real estate loans.

 

 

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 June 30, 2018 compared to a $50,000 provision for loan losses for the three months ended June 30, 2017. The decrease in the provision for the three months ended June 30, 2018 was the result of improving asset delinquency trends. We experienced net charge-offs of $9,000 for the three months ended June 30, 2018. There were no charge-offs in the second quarter of 2017. The allowance for loan losses was $1.2 million, or 0.88% of net loans outstanding, at June 30, 2018, $1.2 million, or 0.88% of net loans outstanding, at December 31, 2017 and $1.1 million, or 0.80% of net loans outstanding, at June 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 June 30, 2018 and June 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 $30,000, or 17.9%, to $138,000 for the three months ended June 30, 2018 from $168,000 for the three months ended June 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 to $6,000 for the three months ended June 30, 2018 from $55,000 for the three months ended June 30, 2017, or $49,000. Financial services income increased $6,000, or 18.8% to $38,000 for the three months ended June 30, 2018 from $32,000 for the three months ended June 30, 2017. Fee income increased $25,000 or 104.2%, to $49,000 for the three months ended June 30, 2018 from $24,000 for the three months ended June 30, 2017. The decrease in gains on sale of residential mortgage loans sold was due to lower loan volume in the second 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 second quarter of 2018.

 

Non-Interest Expense. Non-interest expense increased by $55,000, or 4.1%, to $1.4 million for the three months ended June 31, 2018 from $1.3 million for the three months ended June 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 $81,000, or 12.0%, to $756,000 for the three months ended June 30, 2018 from $675,000 for the three months ended June 30, 2017 because of additional personnel. Core processing expenses increased $46,000, or 30.1% to $199,000 for the three months ended June 30, 2018 from $153,000 for the three months ended June 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 $66,000 or 47.5%, to $73,000 for the three months ended June 30, 2018 from $139,000 for the three months ended June 30, 2018. Professional fees decreased due to lower audit and accounting fees in 2018 and the hiring of an internal auditor. FDIC insurance premiums decreased $23,000 or 70.0% due to an over accrual of premiums in the first quarter of 2017. Our FDIC assessment has decreased due to the additional capital raised in 2017.

 

Income Tax Expense. We incurred income tax expense of $33,000 and $23,000 for the three months ended June 30, 2018 and 2017, respectively, resulting in effective rates of 14.6% and 19.8%, respectively. The increase in income tax expense for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 was primarily due to an increase in income before tax.

 

 

Comparison of Operating Results for the Six Months Ended June 30, 2018 and 2017

 

General. Net income increased $103,000, or 40.1%, to $360,000 for the six months ended June 30, 2018, from $257,000 for the six months ended June 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 $392,000, or 11.9%, to $3.7 million for the six months ended June 30, 2018, from $3.3 million for the six months ended June 30, 2017. Our average balance of interest-earning assets increased $14.6 million, or 9.2%, to $174.6 million for the six months ended June 30, 2018 from $160.0 million for the six months ended June 30, 2017 due primarily to an increase in the average balance of loans. The average yield on interest-earning assets increased 10 basis points to 4.23% for the six months ended June 30, 2018 from 4.13% for the six months ended June 30, 2017 as our interest-earning assets repriced with the rising interest rate environment.

 

Interest income on loans increased $279,000, or 9.2%, to $3.3 million for the six months ended June 30, 2018 from $3.0 million for the six months ended June 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 $8.6 million, or 6.3%, to $144.3 million for the six months ended June 30, 2018 from $135.7 million for the six months ended June 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. Our average yield on loans increased 12 basis points to 4.61% for the six months ended June 30, 2018 from 4.49% for the six months ended June 30, 2017, as our adjustable rate loans repriced with the rising interest rate environment.

 

Interest income on available-for-sale securities increased $82,000, or 42.1%, to $277,000 for the six months ended June 30, 2018 from $195,000 for the six months ended June 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 27 basis points to 2.16% for the six months ended June 30, 2018 from 1.89% for the six months ended June 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 $5.0 million, or 24.5%, to $25.6 million for the six months ended June 30, 2018 from $20.6 million for the six months ended June 30, 2017.

 

Interest Expense. Interest expense increased $200,000, or 30.3%, to $861,000 for the six months ended June 30, 2018 from $661,000 for the six months ended June 30, 2017, due to increases in interest expense on deposits and borrowings. Our average balance of interest-bearing liabilities increased $6.3 million, or 4.4%, to $147.3 million for the six months ended June 30, 2018 from $141.1 million for the six months ended June 30, 2017 due primarily to increases in the average balance of certificates of deposit. Our average rate on interest-bearing liabilities increased 23 basis points to 1.17% for the six months ended June 30, 2018 from 0.94% for the six months ended June 30, 2017 primarily as a result of increases in the average rate on FHLBNY borrowings and certificates of deposit.

 

Interest expense on deposits increased $129,000, or 28.7%, to $579,000 for the six months ended June 30, 2018 from $450,000 for the six months ended June 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 0.97% for the six months ended June 30, 2018 from 0.77% for the six months ended June 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 27 basis points to 1.45% for the six months ended June 30, 2018 from 1.18% for the six months ended June 30, 2017. In addition, the average balance of certificates of deposit increased by $5.7 million to $72.3 million for the six months ended June 30, 2018 from $66.6 million for the six months ended June 30, 2017, which reflected the majority of the growth in the average balance of deposits.

 

Interest expense on borrowings increased $71,000, or 33.7%, to $282,000 for the six months ended June 30, 2018 from $211,000 for the six months ended June 30, 2017. The increase in interest expense on borrowings reflected the increase in the average rate of FHLBNY borrowings which increased by 36 basis points to 2.06% for the six months ended June 30, 2018 from 1.70% for the six months ended June 30, 2017. The average balance of borrowings with the FHLBNY increased in the first half of 2018 as compared to the first half of 2017 by $2.6 million from $24.8 million to $27.4 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 $192,000, or 7.3%, to $2.8 million for the six months ended June 30, 2018 from $2.6 million for the six months ended June 30, 2017, primarily as a result of the growth in net interest-earning assets which increased $8.3 million or 44.0% from $18.9 million for the six months ended June 30, 2017 to $27.3 million for the six months ended June 30, 2018. Our net interest rate spread decreased by 12 basis points to 3.07% for the six months ended June 30, 2018 from 3.19% for the six months ended June 30, 2017, and our net interest margin decreased by five basis points to 3.25% for the six months ended June 30, 2018 from 3.30% for the six months ended June 30, 2017.

 

 

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 six months ended June 30, 2018 of $10,000 as compared to a $90,000 provision for loan losses for the six months ended June 30, 2017. The decrease in the provision for the six months ended June 30, 2018 was the result of increased asset quality and improving asset delinquency trends. We experienced net charge-offs of $9,000 for the six months ended June 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 0.88% of net loans outstanding, at June 30, 2018, $1.2 million, or 0.88% of net loans outstanding, at December 31, 2017 and $1.1 million, or 0.80% of net loans outstanding, at June 30, 2017.

 

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate for the six months ended June 30, 2018 and June 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 $34,000, or 10.9%, to $278,000 for the six months ended June 30, 2018 from $312,000 for the six months ended June 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 to $7,000 for the six months ended June 30, 2018 from $73,000 for the six months ended June 30, 2017 or $66,000. Financial services income increased $21,000, or 30.4% to $90,000 for the six months ended June 30, 2018 from $69,000 for the six months ended June 30, 2017. Fee income increased $36,000 or 75.0% to $84,000 for the six months ended June 30, 2018 from $48,000 for the six months ended June 30, 2017. The decrease in gains on sale of residential mortgage loans sold was due to lower loan volume in the first half 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 half of 2018.

 

Non-Interest Expense. Non-interest expense increased by $130,000, or 5.1%, to $2.7 million for the six months ended June 31, 2018 from $2.5 million for the six months ended June 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 $146,000, or 5.7%, to $1.5 million for the six months ended June 30, 2018 from $1.3 million for the six months ended June 30, 2017 because of additional personnel. Core processing expenses increased $87,000, or 28.7% to $390,000 for the six months ended June 30, 2018 from $303,000 for the six months ended June 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 $91,000 or 38.6%, to $145,000 for the six months ended June 30, 2018 from $236,000 for the six months ended June 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 $46,000 or 79.3% due to an over accrual of premiums in the first quarter of 2017. Our FDIC assessment has decreased due to the additional capital raised in 2017.

 

Income Tax Expense. We incurred income tax expense of $68,000 and $63,000 for the six months ended June 30, 2018 and 2017, respectively, resulting in effective rates of 15.9% and 19.7%, respectively. The increase in income tax expense for the six months ended June 30, 2018 as compared to the same period in 2017 was primarily due to an increase in income before tax.

 

 

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 $706,000, or 0.38% of total assets, at June 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 June 30, 2018				At December 31, 2017
		(Dollars in thousands)
Non-accrual loans:
Residential:
One- to four-family		$	706			$	1,177
Home equity loans and lines of credit			-				-
Construction			-				-
Commercial real estate			-				-
Commercial and industrial			-				-
Consumer and other			-				-
Total non-accrual loans		$	706			$	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 pass due		$	-			$	-
Total non-performing loans			706				1,177
Real estate owned			-				-
Total non-performing assets		$	706			$	1,177
Total non-performing loans to total loans			0.48	%			0.83	%
Total non-performng loans to total assets			0.38	%			0.67	%
Total non-performing assets to total assets			0.38	%			0.67	%

 

 

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

 

		At or for the Six Months Ended June 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			-				61
Consumer and other			9				-
Total charge-offs			9				125
Recoveries:
Residential:
One- to four-family			-				-
Home equity loans and lines of credit			-				-
Construction			-				-
Commercial real estate			-				-
Commercial and industrial			-				-
Consumer and other			-				-
Total recoveries			-				-
Net charge-offs			9				125
Provision for loan losses			10				90
Balance at end of period		$	1,242			$	1,135
Ratios:
Net charge-offs to average loans outstanding			0.01	%			0.09	%
Allowance for loan losses to non-performing loans at end of period			175.92	%			99.13	%
Allowance for loan losses to total loans at end of period			0.88	%			0.80	%

 

 

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 June 30, 2018, we had a $80.1 million line of credit with the FHLBNY and a $2.5 million line of credit with Zions Bank. At June 30, 2018, we had $29.8 million in outstanding borrowings from the FHLBNY. We have not borrowed against the line of credit with Zions Bank during the six months ended June 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 June 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 June 30, 2018, cash and due from banks totaled $3.4 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $26.9 million at June 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 June 30, 2018, totaled $39.1 million, or 29.4%, 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 June 30, 2018, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at June 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 June 30, 2018, we had outstanding commitments to originate loans of $1.7 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.

 

 

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.

 

 

PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

As of June 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 six months ended June 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

 

 

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)
August 14, 2018	/s/ Joseph G. Vitale
	Joseph G. Vitale
	President and Chief Executive Officer
August 14, 2018	/s/ Vincent J. Fazio
	Vincent J. Fazio
	Executive Vice President and Chief Financial Officer