Seneca Financial Corp. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Seneca Financial Corp.	tm2020459d1_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Seneca Financial Corp.	tm2020459d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Seneca Financial Corp.	tm2020459d1_ex31-1.htm

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, 2020

¨	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)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Not Applicable		Not Applicable		Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES x NO ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of August 13, 2020, there were 1,912,959 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, 2020 (Unaudited) and December 31, 2019	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)	5
	Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	53

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other information	54
Item 6.	Exhibits	54

SIGNATURES		55

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except shares and per share data)

	June 30, 2020			December 31, 2019
		(unaudited)
ASSETS
Cash and cash equivalents	$	10,296		$	3,094
Securities, available-for-sale		37,635			27,959
Loans, net of allowance for loan losses of $1,433 and $1,241		174,114			164,388
Federal Home Loan Bank of New York stock, at cost		2,957			2,820
Premises and equipment, net		5,306			5,414
Bank owned life insurance		2,518			2,492
Pension assets		2,831			2,831
Accrued interest receivable		1,072			799
Other assets		1,092			441
Total assets	$	237,821		$	210,238

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing	$	26,459		$	16,719
Interest bearing		132,417			135,192
Total Deposits		158,876			151,911
Federal Home Loan Bank advances and Payroll Protection Liquidity Facility		51,504			32,900
Advances from borrowers for taxes and insurance		2,533			2,234
Other liabilities		3,097			2,124
Total liabilities		216,010			189,169
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 1,912,959 shares outstanding at June 30, 2020 and December 31, 2019		9			9
Additional paid-in capital		7,870			7,858
Treasury stock, at cost (65,964 shares at June 30, 2020 and December 31, 2019)		(579	)		(579	)
Retained earnings		16,896			16,604
Unearned ESOP shares, at cost		(713	)		(725	)
Accumulated other comprehensive loss		(1,672	)		(2,098	)
Total stockholders' equity		21,811			21,069
Total liabilities and stockholders' equity	$	237,821		$	210,238

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

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except shares and per share data)

	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020		2019
INTEREST INCOME
Loans, including fees	$	1,961	$	1,974		$	3,879	$	3,860
Securities		234		219			458		447
Other		2		4			8		11
Total interest income		2,197		2,197			4,345		4,318
INTEREST EXPENSE
Deposits		300		445			685		871
Advances and borrowings		199		216			385		415
Total interest expense		499		661			1,070		1,286
Net interest income		1,698		1,536			3,275		3,032
PROVISION FOR LOAN LOSSES		180		55			260		90
Net interest income after provision for loan losses		1,518		1,481			3,015		2,942
NON-INTEREST INCOME
Service fees		28		34			61		67
Income from financial services		59		99			128		149
Fee income		52		68			127		124
Earnings on bank-owned life insurance		14		13			27		27
Net gains on sales of available-for-sale securities		33		-			35		-
Net gains on sale of residential mortgage loans		63		14			68		35
Total non-interest income		249		228			446		402
NON-INTEREST EXPENSE
Compensation and employee benefits		817		767			1,602		1,487
Core processing		161		136			343		334
Premises and equipment		162		129			359		251
Professional fees		136		128			202		214
Postage & office supplies		25		25			59		53
FDIC premiums		24		16			37		29
Advertising		61		45			133		93
Mortgage recording tax		-		(76	)		-		(75	)
Director fees		29		36			73		80
FHLB pre-payment penalty on term advance		108		-			108		-
Other		93		115			182		209
Total non-interest expense		1,616		1,321			3,098		2,675
Income before provision for income taxes		151		388			363		669
PROVISION FOR INCOME TAXES		36		73			71		124
Net income	$	115	$	315		$	292	$	545

Net income per common shares - basic and diluted	$	0.06	$	0.17		$	0.16	$	0.29

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

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
NET INCOME	$	115		$	315	$	292		$	545

OTHER COMPREHENSIVE INCOME, BEFORE TAX
Available-for-sale securities:
Unrealized holding gains arising during period		1,175			360		540			681

Less reclassification adjustment for net gains included in net income		(33	)		-		(35	)		-

Net unrealized gains on available-for-sale securities		1,142			360		505			681

Defined benefit pension plan:
Net gains arising during the period		-			-		-			-
Less reclassification of amortization of net losses recognized in net pension expense		-			-		-			-

Net changes in defined benefit pension plan		-			-		-			-

OTHER COMPREHENSIVE INCOME, BEFORE TAX		1,142			360		505			681

Tax effect		214			77		79			144

OTHER COMPREHENSIVE INCOME, NET OF TAX		928			283		426			537

TOTAL COMPREHENSIVE INCOME	$	1,043		$	598	$	718		$	1,082

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

SENECA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands)

													Accumulated
			Additional							Unearned			Other
	Common		Paid-In		Treasury			Retained		ESOP			Comprehensive			Total
	Stock		Capital		Stock			Earnings		Shares			Loss			Equity
THREE MONTHS ENDED JUNE 30, 2020

BALANCE, APRIL 1, 2020	$	9	$	7,864	$	(579	)	$	16,781	$	(719	)	$	(2,600	)	$	20,756
Net income		-		-		-			115		-			-			115
Other comprehensive income		-		-		-			-		-			928			928
ESOP shares committed to be released (646 shares)		-		-		-			-		6			-			6
Stock-based compensation		-		6		-			-		-			-			6

BALANCE, JUNE 30, 2020	$	9	$	7,870	$	(579	)	$	16,896	$	(713	)	$	(1,672	)	$	21,811

THREE MONTHS ENDED JUNE 30, 2019

BALANCE, APRIL 1, 2019	$	9	$	7,846	$	(148	)	$	15,717	$	(741	)	$	(2,930	)	$	19,753
Net income		-		-		-			315		-			-			315
Other comprehensive loss		-		-		-			-		-			283			283
Purchase of treasury shares at cost (27,048)		-		-		(233	)		-		-			-			(233	)
ESOP shares committed to be released (646 shares)		-		-		-			-		7			-			7

BALANCE, JUNE 30, 2019	$	9	$	7,846	$	(381	)	$	16,032	$	(734	)	$	(2,647	)	$	20,125

													Accumulated
			Additional							Unearned			Other
	Common		Paid-In		Treasury			Retained		ESOP			Comprehensive			Total
	Stock		Capital		Stock			Earnings		Shares			Loss			Equity
SIX MONTHS ENDED JUNE 30, 2020

BALANCE, JANUARY 1, 2020	$	9	$	7,858	$	(579	)	$	16,604	$	(725	)	$	(2,098	)	$	21,069
Net income		-		-		-			292		-			-			292
Other comprehensive income		-		-		-			-		-			426			426
ESOP shares committed to be released (1,294 shares)		-		-		-			-		12			-			12
Stock-based compensation		-		12		-			-		-			-			12
BALANCE, JUNE 30, 2020	$	9	$	7,870	$	(579	)	$	16,896	$	(713	)	$	(1,672	)	$	21,811

SIX MONTHS ENDED JUNE 30, 2019

BALANCE, JANUARY 1, 2019	$	9	$	7,846	$	-		$	15,487	$	(747	)	$	(3,184	)		19,411
Net income		-		-		-			545		-			-			545
Other comprehensive loss		-		-		-			-		-			537			537
ESOP shares committed to be released (1,294 shares)		-		-		-			-		13			-			13
Purchase of treasury shares at cost (44,509 shares)		-		-		(381	)		-		-			-			(381	)
BALANCE, JUNE 30, 2019	$	9	$	7,846	$	(381	)	$	16,032	$	(734	)	$	(2,647	)	$	20,125

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,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	292		$	545
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation and amortization		179			107
Provision for loan losses		260			90
Net amortization of premiums and discounts on securities		127			105
Gain on sale of residential mortgage loans		(68	)		(35	)
Proceeds from sale of residential mortgage loans		2,574			1,441
Loans originated and sold		(2,506	)		(1,406	)
Gain on sale of available-for-sale securities		(35	)		-
Amortization of deferred loan fees		(70	)		13
ESOP compensation expense		12			13
Stock based compensation expense		12			-
Earnings on investment in bank owned life insurance		(27	)		(27	)
(Increase) decrease in accrued interest receivable		(273	)		8
Increase in other assets		(651	)		(504	)
Increase in other liabilities		860			60
Net cash flow provided by operating activities		686			410
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in securities available-for-sale:
Proceeds from calls and maturities		-			280
Proceeds from sales		3,332			1,795
Principal repayments		1,384			874
Purchases		(13,944	)		(1,991	)
Purchase of Federal Home Loan Bank of New York stock		(558	)		(830	)
Redemption of Federal Home Loan Bank of New York stock		421			547
Loan originations and principal collections, net		(9,916	)		(9,542	)
Purchases of premises and equipment		(71	)		(1,014	)
Net cash flow used in investing activities		(19,352	)		(9,881	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits		6,965			3,973
Increase in advances from borrowers for taxes and insurance		299			641
Purchase of treasury stock		-			(381	)
Proceeds from the Payroll Protection Liquidity Facility		17,104			-
Repayment of long-term FHLB advances		(1,100	)		(4,000	)
Proceeds from long-term FHLB advances		5,500			10,500
Decrease in short-term FHLB advances		(2,900	)		(1,000	)
Net cash flow provided by financing activities		25,868			9,733
Net change in cash and cash equivalents		7,202			262
CASH AND CASH EQUIVALENTS - beginning of year		3,094			3,470
CASH AND CASH EQUIVALENTS - end of year	$	10,296		$	3,732
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest on deposits and borrowed funds	$	602		$	1,223
Income taxes	$	35		$	125
Transfer of loans to other real estate owned	$	-		$	220

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

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX MONTHS ended JUNE 30, 2020 and 2019 (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, North Syracuse and Bridgeport, 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 consolidated financial position of the Company as of June 30, 2020 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 consolidated 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, 2020 are not necessarily indicative of the results to be expected for the full year or any other period.

The United States, as well as many countries around the world, are presently in the midst of a global health emergency related to a virus, commonly known as Novel Coronavirus (COVID-19). The overall consequences of COVID-19 on a global, national, regional and local level are unknown, but it has the potential to result in a significant negative economic impact. The full impact of this situation on the Company and its future results and financial position is not presently determinable.

Use of Estimates – The preparation of consolidated 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 consolidated 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 consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2020.

RECENT ACCOUNTING PRONOUNCEMENTS

The following accounting standard was adopted in the first quarter ended March 31, 2020:

On January 1, 2020, the Company adopted ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) related to premium amortization on purchased callable debt securities. This Update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019. Early adoption was permitted, including adoption in an interim period. If an entity early adopted the amendments in an interim period, any adjustments were reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

Accounting Pronouncements to be adopted in future periods:

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 exists 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 July 2019, the FASB decided to add a project to its technical agenda to propose staggered effective dates for certain accounting standards, including ASU 2016-13. The FASB has proposed an approach that ASU 2016-13 will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will be effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The FASB approved the proposal in October 2019. The Company is currently a smaller reporting company, and the Company’s expected adoption date for ASU 2016-13 will change from fiscal years beginning after December 15, 2019 to fiscal years beginning after January 1, 2023, including interim periods within those fiscal years.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

2.	RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

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

Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or an operating lease (i.e., the classification criteria for distinguishing between finance leases and operating leases are substantially like the classification criteria for distinguishing between capital leases and operating leases under the previous guidance). However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the consolidated statement of financial condition, ASU No. 2016-02 will require both operating and finance leases to be recognized on the consolidated statement of financial condition. Additionally, the ASU will require disclosures to help investors and other consolidated 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, 2020, and for interim periods within fiscal years beginning after December 15, 2021. 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 July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends FASB Accounting Standards Codification (ASC) Topic 842, Leases, to (1) add an optional transition method that would permit entities to apply the new requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption, and (2) provide a practical expedient for lessors regarding the separation of the lease and non-lease components of a contract. This guidance did not change the Company’s assessment of the impact of ASU No. 2016-02 on the consolidated financial statements as described above.

In June 2020, the FASB issued No. ASU 2020-05, Coronavirus Disease 2019 (COVID-19) in response to the pandemic which has adversely affected the global economy and caused significant and widespread business and capital market disruptions. The FASB is committed to supporting and assisting stakeholders during this difficult time. The FASB is issuing this Update as a limited deferral of the effective dates of the following Updates (including amendments issued after the issuance of the original Update) to provide immediate, near-term relief for certain entities for whom these Updates are either currently effective or imminently effective: 1. Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Revenue) 2. Accounting Standards Update No. 2016-02, Leases (Topic 842) (Leases). The Company plans to defer Leases to fiscal years beginning after December 15, 2021. The Company currently does not lease equipment or buildings and does not anticipate a material effect on the Company’s Financial statements.

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

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

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

2.	RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

For Public Business Entities, the amended guidance is effective for fiscal years beginning after December 15, 2019 (i.e., calendar-year 2020), and for interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 30, 2020, and interim periods within annual periods beginning after December 15, 2021. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The FASB’s amendments primarily impact ASC 740, Income Taxes, and may impact both interim and annual reporting periods. This ASU is effective for the Company in 2022. Early adoption is permitted. The Company does not expect the new guidance to have a material impact on the consolidated financial statements and does not expect to early adopt.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX Months ended JUNE 30, 2020 and 2019 (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, 2020 (Unaudited):
Municipal securities	$	21,171	$	593	$	-		$	21,764
Mortgage-backed securities and collateralized mortgage obligations		10,382		200		(27	)		10,555
Corporate securities		5,306		41		(31	)		5,316
	$	36,859	$	834	$	(58	)	$	37,635


December 31, 2019:
U.S. government agency securities	$	1,142	$	-	$	(36	)	$	1,106
Municipal securities		10,454		174		(5	)		10,623
Mortgage-backed securities and collateralized mortgage obligations		10,816		69		(33	)		10,852
Corporate securities		5,311		68		(1	)		5,378
	$	27,723	$	311	$	(75	)	$	27,959

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

Investment securities with carrying amounts of $9.6 million and $8.5 million were pledged to secure advances and for other purposes required or permitted by law at June 30, 2020 and 2019, respectively.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	7,211	$	7,217	$	-	$	-
Due after one year through five years		8,414		8,569		6,716		6,772
Due after five years through ten years		6,292		6,560		6,448		6,552
Due after ten years		4,560		4,734		3,743		3,783
Mortgage-backed securities and collateralized mortgage obligations		10,382		10,555		10,816		10,852
	$	36,859	$	37,635	$	27,723	$	27,959

During the three months ended June 30, 2020 the Company purchased $7.7 million of securities. During the six months ended June 30, 2020 the Company purchased $13.9 million of securities. During the three months ended June 30, 2020 the Company sold $1.9 million of securities. During the six months ended June 30, 2020 the Company sold $3.3 million in securities with a gross realized gain of $35,000 and no realized loss. The purchases and sales were a rebalancing of the investment portfolio that occurs when market conditions change. The Company during the six months ended June 30, 2019 purchased $2.0 million of securities. During the six months ended June 30, 2019 the Company sold $1.8 million of securities with a gross unrealized gain of $6,000 and a gross unrealized loss of $5,000.

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, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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 or equal to Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2020 (Unaudited):
Municipal securities	$	-		$	-	$	-		$	-
Mortgage-backed securities and collateralized mortgage obligations		(27	)		4,038		-			-
Corporate Securities		(31	)		3,974		-			-
	$	(58	)	$	8,012	$	-		$	-

December 31, 2019:
U.S. government agency securities	$	(36	)	$	1,106	$	-		$	-
Municipal securities		(5	)		1,885		-			-
Mortgage-backed securities and collateralized mortgage obligations		-			-		(33	)		2,969
Corporate Securities		-			-		(1	)		509
	$	(41	)	$	2,991	$	(34	)	$	3,478

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For the three and six months ended June 30, 2020 and 2019, the Company did not record an other-than-temporary impairment charge.

At June 30, 2020, no securities were at a continuous loss position for more than twelve months. At June 30, 2020, three mortgage-backed and eight corporate securities were at a continuous loss for less than twelve months.

At December 31, 2019, five collateralized mortgage obligations and a corporate security were in a continuous loss position for more than twelve months. At December 31, 2019, one U.S. government agency security and three municipal securities were at a continuous loss for less than twelve months.

The mortgage-backed securities and collateralized mortgage obligations were issued by U.S. Government sponsored agencies. The municipal securities and corporate securities are rated investment grade by Standard and Poor’s BBB- or higher. All are paying in accordance with their terms with no deferrals of interest or defaults. Because the decline in fair value is attributable to changes in interest rates, not credit quality, and because management does not intend to sell and will not be required to sell these securities prior to recovery or maturity, no declines are deemed to be other-than-temporary. The short-term decline in the fair values is a result of market conditions related to the COVID-19 virus. Corporate securities at a Continuous Loss for less then twelve months are adjustable rate and the change in market values are due to a change in interest rate not credit Quality. Market values have since stabilized and as of June 30, 2020 the investment portfolio recognized an unrealized gain in investment fair values.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

LOANS

Net loans at June 30, 2020 and December 31, 2019 are as follows:

	June 30, 2020			December 31, 2019
	(Unaudited)
	(In thousands)
Mortgage loans on real estate:
One-to four-family first lien residential	$	93,376		$	99,248
Residential construction		3,762			3,710
Home equity loans and lines of credit		8,559			9,109
Commercial		34,963			34,432
Total mortgage loans on real estate		140,660			146,499
Commercial and industrial		32,948			16,814
Consumer loans		2,248			1,876
Total loans		175,856			165,189
Allowance for loan losses		(1,433	)		(1,241	)
Net deferred loan origination (fees) and costs		(309	)		440
Net loans	$	174,114		$	164,388

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, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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 80% of the portfolio at June 30, 2020 and 89% of the portfolio at December 31, 2019. Loans secured by real estate provide collateral protection and thus significantly reduce the inherent risk in the portfolio . The $18.1 million PPP loans that we have originated as of June 30, 2020 are 100% guaranteed by the Small Business Administration (“SBA”), and are classified as commercial and industrial loans.

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 months. Special mention loans excluded deferred loans due to the COVID-19 pandemic. Customers who were unemployed due to the COVID-19 pandemic and were current on their loan payments were able to request a deferral of payments for 90 days.

•

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, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX Months ended JUNE 30, 2020 and 2019 (unaudited)

4.	LOANS (Continued)

The following tables present 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, 2020 and December 31, 2019. There were $88,000 of doubtful accounts at June 30, 2020 and no doubtful accounts at December 31, 2019.

	June 30, 2020
	(In thousands)
	Pass		Special Mention		Substandard		Doubtful/Loss		Total
Mortgage loans on real estate:
One-to four-family first lien residential	$	93,376	$	-	$	-	$	-	$	93,376
Residential construction		3,762		-		-		-		3,762
Home equity loans and lines of credit		8,559		-		-		-		8,559
Commercial		32,052		-		2,911		-		34,963
Total mortgage loans on real estate		137,749		-		2,911		-		140,660
Commercial and industrial		32,499		-		361		88		32,948
Consumer loans		2,248		-		-		-		2,248
Total loans	$	172,496	$	-	$	3,272	$	88	$	175,856

	December 31, 2019
	(In thousands)
	Pass		Special Mention		Substandard		Doubtful/Loss		Total
Mortgage loans on real estate:
One-to four-family first lien residential	$	99,248	$	-	$	-	$	-	$	99,248
Residential construction		3,710		-		-		-		3,710
Home equity loans and lines of credit		9,109		-		-		-		9,109
Commercial		31,072		58		3,302		-		34,432
Total mortgage loans on real estate		143,139		58		3,302		-		146,499
Commercial and industrial		16,214		565		35				16,814
Consumer loans		1,876		-		-		-		1,876
Total loans	$	161,229	$	623	$	3,337	$	-	$	165,189

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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, 2020 (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	$	569	$	231	$	914	$	1,714	$	91,662	$	93,376
Residential construction		-		-		-		-		3,762		3,762
Home equity loans and lines of credit		-		-		99		99		8,460		8,559
Commercial		-		-		-		-		34,963		34,963
Total mortgage loans on real estate		569		231		1,013		1,813		138,847		140,660
Commercial and industrial		-		128		134		262		32,686		32,948
Consumer loans		-		4		1		5		2,243		2,248
Total loans	$	569	$	363	$	1,148	$	2,080	$	173,776	$	175,856

	December 31, 2019
	(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	$	778	$	946	$	857	$	2,581	$	96,667	$	99,248
Residential construction		-		-		-		-		3,710		3,710
Home equity loans and lines of credit		67		-		56		123		8,986		9,109
Commercial		245		120		-		365		34,067		34,432
Total mortgage loans on real estate		1,090		1,066		913		3,069		143,430		146,499
Commercial and industrial		52		-		-		52		16,762		16,814
Consumer loans		12		-		8		20		1,856		1,876
Total loans	$	1,154	$	1,066	$	921	$	3,141	$	162,048	$	165,189

Paycheck Protection Program

PPP loans have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred until the lender receives the applicable forgiven amount or 10 months after the period the business has used such funds. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As of June 30, 2020, we approved 280 applications for approximately $18.1 million of loans under the PPP. We limited our investment in PPP loans to our current customers and to a lesser extent, non-customers in our local market area.

Loan Modification/Troubled Debt Restructurings

Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. Lastly, prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

4.	LOANS (Continued)

As of June 30, 2020, we had received requests to modify 192 loans aggregating $30.2 million, primarily consisting of the deferral of principal and interest payments for a 90-day period. Of these modifications, $30.2 million, or 100%, were performing in accordance with their modified terms. Details with respect to actual loan modifications are as follows:

Type of Loan	Number of Loans		Balance		Weighted Average Interest Rate
	(Dollars in thousands)
Mortgage loans on real estate:
One-to four-family first lien residential		116	$	16,232		4.10	%
Residential construction		-		-		-
Home equity loans and lines of credit		12		632		3.25	%
Commercial		41		11,574		5.80	%
Total mortgage loans on real estate		169		28,438		4.77	%
Commercial and industrial		22		1,758		5.31	%
Consumer loans		1		14		4.50	%
Total loans		192	$	30,210		4.80	%

As of July 31, 2020, the balance of loans in deferment totaled 36 loans aggregating $8.1 million, primarily consisting of the deferral of principal and interest payments. Details with respect to actual loan modifications as of July 31, 2020 are as follows:

Type of Loan	Number of Loans		Balance		Weighted Average Interest Rate
	(Dollars in thousands)
Mortgage loans on real estate:
One-to four-family first lien residential		11	$	2,179		4.16	%
Residential construction		-		-		-
Home equity loans and lines of credit		-		-		-
Commercial		20		5,209		5.47	%
Total mortgage loans on real estate		31		7,388		5.08	%
Commercial and industrial		5		685		5.50	%
Consumer loans		-		-		-
Total loans		36	$	8,073		5.12	%

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

4.	LOANS (Continued)

Nonaccrual loans, segregated by class of loan as of June 30, 2020 and December 31, 2019 are as follows:

	June 30, 2020		December 31, 2019
	(Unaudited)
	(In thousands)
Mortgage loans on real estate	$	2,110	$	1,671
Commercial and industrial		134		-
Consumer loans		1		-
Total nonaccrual loans	$	2,245	$	1,671

Non accrual loans are as follows: $1.1 million in residential real estate, $1.0 million in commercial real estate, $134,000 in commercial and industrial loans and $1,000 in consumer loans at June 30, 2020.

The following table summarizes impaired loan information by portfolio class:

	June 30, 2020 (Unaudited) (In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With an allowance recorded:
Mortgage loans on real estate	$	1,207	$	1,207	$	22
Commercial and industrial loans		37		37		37
		1,244		1,244		59
With no allowance recorded:
Mortgage loans on real estate		733		733		-
Commercial and industrial loans		88		88		-
		821		821		-

Total	$	2,065	$	2,065	$	59

	December 31, 2019 (In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With an allowance recorded:
Mortgage loans on real estate	$	327	$	327	$	17
		327		327		17
With no allowance recorded:
Mortgage loans on real estate		1,417		1,417		-
		1,417		1,417		-

Total	$	1,744	$	1,744	$	17

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

4.	LOANS (Continued)

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

	For the Three Months ended June 30, 2020		For the Six Months ended June 30, 2020		For the Year ended December 31, 2019
	(Unaudited)
	(In thousands)
Mortgage loans on real estate	$	1,949	$	1,842	$	1,919
Commercial and industrial loans		130		19		-
Total	$	2,078	$	1,923	$	1,919

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.

The following table presents interest income recognized on impaired loans for the three months ended June 30, 2020 and 2019:

	June 30,
	2020		2019
	(Unaudited)
	(In thousands)
Mortgage loans on real estate - commercial	$	-	$	8
Commercial and industrial loans		-		-
Total	$	-	$	8

The following table presents interest income recognized on impaired loans for the six months ended June 30, 2020 and 2019:

	June 30,
	2020		2019
	(Unaudited)
	(In thousands)
Mortgage loans on real estate - commercial	$	-	$	19

Total	$	-	$	19

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX MONTHS ended JUNE 30, 2020 and 2019 (unaudited)

4.	LOANS (Continued)

The following tables summarize the activity in the allowance for loan losses for the three months ended June 30, 2020 and 2019.

	For the three months ended June 30, 2020
	(In thousands)
	Mortgage Loans on Real Estate		Commercial and Industrial Loans			Consumer Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,097	$	167		$	24		$	11	$	1,299
Charge-offs		-		(46	)		-			-		(46	)
Recoveries		-		-			-			-		-
Provision		134		47			(1	)		-		180
Ending balance	$	1,231	$	168		$	23		$	11	$	1,433

	For the three months ended June 30, 2019
	(In thousands)
	Mortgage Loans on Real Estate		Commercial and Industrial Loans		Consumer Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	879	$	103	$	8	$	110	$	1,100
Charge-offs		-		-		-		-		-
Recoveries		-		-		-		-		-
Provision		15		10		13		17		55
Ending balance	$	894	$	113	$	21	$	127	$	1,155

The following tables summarize the activity in the allowance for loan losses for the six months ended June 30, 2020 and 2019.

	For the six months ended June 30, 2020
	(In thousands)
	Mortgage Loans on Real Estate			Commercial and Industrial Loans			Consumer Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	945		$	121		$	17		$	158		$	1,241
Charge-offs		(14	)		(46	)		(8	)		-			(68	)
Recoveries		-			-			-			-			-
Provision		300			93			14			(147	)		260
Ending balance	$	1,231		$	168		$	23		$	11		$	1,433

	For the six months ended June 30, 2019
	(In thousands)
	Mortgage Loans on Real Estate			Commercial and Industrial Loans			Consumer Loans		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	933		$	132		$	17	$	152		$	1,234
Charge-offs		(169	)		-			-		-			(169	)
Recoveries		-			-			-		-			-
Provision		130			(19	)		4		(25	)		90
Ending balance	$	894		$	113		$	21	$	127		$	1,155

In addition to utilizing quantitative loss factors, we will consider qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. All of these factors are likely to be affected by the COVID-19 pandemic. We increased our allowance for loan losses as of June 30, 2020 and expect to do so for future periods due to the COVID-19 pandemic.

The charge-offs of $46,000 for the three months ended June 30, 2020 consisted of a commercial loan and had a specific reserve.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

5.	COMPREHENSIVE 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, 2020 (Unaudited)
	Unrealized Gains (Losses) on Available-for-Sale Securities			Net Gain on Pension Plan			Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Beginning balance	$	(316	)	$	(2,284	)	$	(2,600	)
Other comprehensive income		928			-			928
Ending balance	$	612		$	(2,284	)	$	(1,672	)

	For the three months ended June 30, 2019 (Unaudited)
	Unrealized Gains on Available-for-Sale Securities			Net Gain on Pension Plan			Accumulated Other Comprehensive (Loss)
	(In thousands)
Beginning balance	$	(182	)	$	(2,748	)	$	(2,930	)
Other comprehensive income (loss)		283			-			283
Ending balance	$	101		$	(2,748	)	$	(2,647	)

	For the six months ended June 30, 2020 (Unaudited)
	Unrealized Gains on Available-for-Sale Securities		Net Gain on Pension Plan			Accumulated Other Comprehensive (Loss)
	(In thousands)
Beginning balance	$	186	$	(2,284	)	$	(2,098	)
Other comprehensive income		426		-			426
Ending balance	$	612	$	(2,284	)	$	(1,672	)

	For the six month ended June 30, 2019 (Unaudited)
	Unrealized on Available-for-Sale Securities			Net Gain on Pension Plan			Accumulated Other Comprehensive (Loss)
	(In thousands)
Beginning balance	$	(436	)	$	(2,748	)	$	(3,184	)
Other comprehensive income (loss)		537			-			537
Ending balance	$	101		$	(2,748	)	$	(2,647	)

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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, 2020 (Unaudited):
Municipal securities	$	21,764	$	-	$	21,764	$	-
Mortgage-backed securities and collateralized mortgage obligations		10,555		-		10,555		-
Corporate securities		5,316		-		5,316		-
	$	37,635	$	-	$	37,635	$	-
December 31, 2019:
U.S. Government Agency Securities	$	1,106	$	-	$	1,106	$	-
Municipal securities		10,623		-		10,623		-
Mortgage-backed securities and collateralized mortgage obligations		10,852		-		10,852		-
Corporate securities		5,378		-		5,378		-
	$	27,959	$	-	$	27,959	$	-

There were no securities transferred out of level 2 securities available-for-sale during the three and six months ended June 30, 2020 or the year ended December 31, 2019.

Required disclosures include fair value information about financial instruments, whether or not recognized in the consolidated statement of financial condition, 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, 2020 and December 31, 2019.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX MONTHS ended JUNE 30, 2020 and 2019 (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 consolidated statement of financial position 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.

Other Real Estate Owned

Assets taken in foreclosure of defaulted loans generally measured at the lower cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 3.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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, 2020 and December 31, 2019 are as follows:

		Carrying		Fair
	Hierarchy	Amount		Value
	(In thousands)
June 30, 2020 (Unaudited):
Financial assets:
Cash and due from banks	Level 1	$	10,296	$	10,296
Securities available-for-sale	Level 2		37,635		37,635
Investment in FHLB stock	Level 2		2,957		2,957
Loans, net	Level 3		174,114		174,485
Accrued interest receivable	Level 1		1,072		1,072

		Carrying		Fair
	Hierarchy	Amount		Value
	(In thousands)
Financial liabilities:
Deposits	Level 1/2		158,876		161,531
Advances and borrowings from FHLB and PPLF	Level 2		51,504		51,504
Accrued interest payable	Level 1		74		74
Advances from borrowers for taxes and insurance	Level 1		2,533		2,533

December 31, 2019:
Financial assets:
Cash and due from banks	Level 1	$	3,094	$	3,094
Securities available-for-sale	Level 2		27,959		27,959
Investment in FHLB stock	Level 2		2,820		2,820
Loans, net	Level 3		164,388		160,972
Accrued interest receivable	Level 1		799		799
Financial liabilities:
Deposits	Level 1/2		151,911		150,792
Advances and borrowings from FHLB	Level 2		32,900		32,900
Accrued interest payable	Level 1		106		106
Advances from borrowers for taxes and insurance	Level 1		2,234		2,234

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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, 2020 and December 31, 2019 were as follows:

	Total		Level 1		Level 2		Level 3
	(In thousands)
June 30, 2020 (Unaudited):
Impaired loans	$	1,185	$	-	$	-	$	1,185

December 31, 2019:
Impaired loans	$	310	$	-	$	-	$	310

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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
	collateral or	Discounted cash flow analysis		6%-11	%
	asking price less
	selling costs	Costs to sell		10	%

Other real estate owned	Market	Costs to sell		10	%
	valuation
	of property

At June 30, 2020, the fair value consists of impaired loan balances of $1.2 million net of valuation allowance of $59,000 and at December 31, 2019, the fair value consists of loan balances of $327,000, net of a valuation allowance of $17,000.

At June 30, 2020 and at December 31, 2019, the Company did not have OTHER REAL ESTATE OWNED.

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, 2020 and December 31, 2019, 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 $222,000 at June 30, 2020 and December 31, 2019, respectively.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (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,
	2020		2019
	(Unaudited)
	(In thousands)
Commitments to Grant Loans	$	384	$	816
Unfunded Commitments Under Lines of Credit	$	6,279	$	5,887

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and MARCH 31, 2019 (unaudited)

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 consolidated 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, 2020, 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 2.5% of risk-weighted assets.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a Bank’s Tier 1 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. A financial institution can elect to be subject to this new definition. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio at 9.00%. Pursuant to the CARES Act, the federal banking agencies in April 2020 issued interim final rules to set the Community Bank Leverage Ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio will increase to 8.5% for the calendar year. Community banks will have until Jan. 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. The Bank elected to adopt the Community Bank Leverage Ratio as of June 30, 2020.

As of June 30, 2020, 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. 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, 2020 and December 31, 2019 are as follows:

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

REGULATORY CAPITAL REQUIREMENTS (continued)

	Actual					Capital Adequacy Purposes					To be Well Capitalized Under Prompt and Corrective Action Provisions					Minimum Capital Adequacy with Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In thousands)
As of June 30, 2020 (Unaudited):
Tier 1 capital to assets	$	21,573		9.83	%	$	15,360		7.00	%	$	17,554		8.00	%		N/A		N/A
As of December 31, 2019:
Total core capital to risk weighted assets	$	22,427		16.32	%	$	10,992		8.00	%	$	13,740		10.00	%	$	14,427		10.50	%
Tier 1 capital to risk weighted assets		21,186		15.42	%		8,244		6.00	%		10,992		8.00	%		11,679		8.50	%
Tier 1 common equity to risk weighted assets		21,186		15.42	%		6,183		4.50	%		8,931		6.50	%		9,618		7.00	%
Tier 1 capital to assets		21,186		10.10	%		8,394		4.00	%		10,493		5.00	%		10,493		5.00	%

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

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, 2020 and December 31, 2019, the Company recorded $131,000 and $101,000, respectively for the SERP in other liabilities. For the three months ended June 30, 2020 and 2019, the expense included in employee benefits for the SERP totaled $6,000 and $9,000 respectively. For the six months ended June 30, 2020 and 2019, the expense included in employee benefits for the SERP totaled $12,000 and $18,000 respectively.

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 table presents 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,
	2020			2019
		(In thousands)
Service cost	$	71		$	71
Interest cost		110			119
Expected return on assets		(234	)		(214	)
Amortization of unrecognized loss		45			26
Net periodic pension benefit cost	$	(8	)	$	2

		For the six months ended June 30,
		2020			2019
		(In thousands)
Service cost	$	142		$	142
Interest cost		221			238
Expected return on assets		(468	)		(428	)
Amortization of unrecognized loss		90			52
Net periodic pension cost	$	(15	)	$	4

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 quarter ended March 31, 2020.

Employee stock ownership plan (“ESOP”)

Effective upon the completion of the Company's initial public stock offering in October 2017, the Bank established an Employee Stock Ownership Plan (“ESOP”) for all eligible employees. The ESOP used $775,740 in proceeds from a term loan obtained from the Company to purchase 77,574 shares of common stock in the initial public offering at a price of $10.00 per share. The ESOP loan will be repaid principally from the Bank's contribution to the ESOP in annual payments through 2047 based on the prime rate of interest on the first business day each year. Shares are released to participants on a straight-line basis over the loan term and allocated based on participant compensation. The Bank recognizes compensation benefit expense as shares are committed for release at their current market price. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated shares would be recorded as a reduction of retained earnings and dividends on unallocated shares would be recorded as a reduction of debt. The Company recognized $6,000 and $12,000 for the three and six months ended June 30, 2020 and June 30, 2019, respectively. At December 31, 2019, there were 71,820 shares not yet released having an aggregate market value of approximately $675,117. 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, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

STOCK BASED COMPENSATION

A summary of the Company’s stock option activity and related information for its equity incentive plan for the three and six months ended June 30, 2020 is as follows:

	For the three and six months ended June 30, 2020
	Options			Weighted Average Exercise Price Per Share
Outstanding at the beginning of the period		47,500		$	9.20

Grants		5,000			6.52

Exercised		-			-
Forfeitures		(4,000	)		9.20
Outstanding at period end		48,500		$	8.94

Exercisable at June 30, 2020		-			-

The grants to senior management and directors vest over a five-year period in equal installments, with the first installment vesting on the anniversary date of the grant and succeeding installments on each anniversary thereafter, through 2025.

The compensation expense of the awards is based on the fair value of the instruments on the date of the grant.

The Company recorded compensation expense in the amount of $6,000, for the three months ended June 30, 2020 and $12,000 for the six months ended June 30, 2020. There were 5,000 grants of awards during the three and six months ended June 30, 2020.

Compensation costs related to share-based payments transactions are recognized based on the grant-date fair value of the stock-based compensation issued. Compensation costs are recognized over the period than an employee provides service in exchange for the award. Compensation costs related to the employee Stock Ownership plan are dependent upon the average stock price and the shares committed to be released to the plan participants through the period in which income is reported.

In August of 2019, the board of directors of the Company approved the grant of stock option awards to its directors and executive officers under the 2019 Equity Plan that had 96,967 shares authorized for option awards. A total of 47,500 stock option awards were granted to five directors and nine officers of the Company at an exercise price of $9.20 per share. The awards will vest ratably over five years (20% per year for each year of the participant’s service with the Company) and will expire ten years from the date of the grant, or September 2029. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 1.5%;volatility factors of the expected market price of the Company's common stock of 21.23%; weighted average expected lives of the options of 7.5 years. Based upon these assumptions, the weighted average fair value of options granted was $2.52.

In May of 2020, the board of directors of the Company approved the grant of stock option awards to its officers under the 2019 Equity Plan that had 96,967 shares authorized for option awards. A total of 5,000 stock option awards were granted to five officers of the Company at an exercise price of $6.52 per share. The awards will vest ratably over five years (20% per year for each year of the participant’s service with the Company) and will expire ten years from the date of the grant, or May 2030. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 0.49%; volatility factors of the expected market price of the Company's common stock of 34.21%; weighted average expected lives of the options of 6.5 years. Based upon these assumptions, the weighted average fair value of options granted was $2.27.

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX months ended JUNE 30, 2020 and 2019 (unaudited)

10.

EARNINGS PER SHARE COMMON

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Income available to common stockholders is net income to the Company. 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.

Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding under the treasury stock method if all potentially dilutive common shares (such as stock options) issued became vested during the period. The Company had dilutive common stock equivalents of -0- and 257 during the three and six months ended June 30, 2020, respectively. There were no dilutive common stock equivalents for the three and six months ended June 30, 2019.

Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented. Anti-dilutive stock options, not included in the computation below, were 26,660 and 18,069 for the three and six months ended June 30, 2020, respectively. There were no anti-dilutive shares for the three and six months ended June 30, 2019.

The following table sets forth the calculation of basic and diluted earnings per share:

	Three months ended June 30, (Unaudited)
(In thousands, except share and per share data)	2020		2019
Basic earnings per common share:
Net income available to common stockholders	$	115	$	315
Weighted average common shares outstanding basic		1,841,786		1,895,824
Weighted average common shares outstanding dilutive		1,841,786		1,895,824
Earnings per share basic and dilutive	$	0.06	$	0.17

	Six months ended June 30, (Unaudited)
(In thousands, except share and per share data)	2020		2019
Basic earnings per common share:
Net income available to common stockholders	$	292	$	545
Weighted average common shares outstanding basic		1,841,436		1,861,301
Weighted average common shares outstanding dilutive		1,841,720		1,861,301
Earnings per share basic and dilutive	$	0.16	$	0.29

SENECA FINANCIAL CORP. AND SUBSIDIARIES

Notes to the consolidated Financial Statements

as of JUNE 30, 2020 (unaudited) and December 31, 2019 and THE

three AND SIX Months ended JUNE 30, 2020 and 2019 (unaudited)

11.

NON-INTEREST INCOME

The Company has included the following table regarding the Company's non-interest income for the periods presented:

	(Unaudited)
	For the three months ended June 30,
	2020		2019
	(In thousands)
Service fees
Deposit related fees	$	11	$	10
Loan servicing income		22		24
Total service fees		33		34
Income from financial services
Securities commission income		57		97
Insurance commission income		2		2
Total insurance and securities commission income		59		99
Card income
Debit card interchange fee income		26		24
ATM fees		5		4
Insufficient fund fees		15		32
Total card and insufficient funds income		46		60
Realized gain on sale of residential mortgage loans and available-for-sale securities
Realized gain on sales of residential mortgage loans		63		14
Realized net gain on available-for-sales securities		33		-
Bank owned life insurance		14		13
Other miscellaneous income		1		8
Total non-interest income	$	249	$	228

	(Unaudited)
	For the six months ended June 30,
	2020		2019
	(In thousands)
Service fees
Deposit related fees	$	20	$	20
Loan servicing income		46		47
Total service fees		66		67
Income from financial services
Securities commission income		124		143
Insurance commission income		4		6
Total insurance and securities commission income		128		149
Card income
Debit card interchange fee income		51		45
ATM fees		10		9
Insufficient fund fees		55		57
Total card and insufficient funds income		116		111
Realized gain on sale of residential mortgage loans, available for sale securities and fixed assets
Realized gain on sales of residential mortgage loans		68		35
Realized net gain on available-for-sales securities		35		-
Bank owned life insurance		27		27
Other miscellaneous income		6		13
Total non-interest income	$	446	$	402

The Company recognizes revenue as it is earned. The following is a discussion of key revenues within the scope of the new revenue guidance:

Service fees – Revenue from fees on deposit accounts is earned at the time that the charge is assessed to the customer's account. Fee waivers are discretionary and usually reversed within the same reporting period as assessed.

Fee income – Fee income is earned through commissions and is satisfied over the time which the fee has been assessed.

Card income and insufficient funds fees – Card income consists of interchange fees from consumer debit card networks and other card related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur. Insufficient funds fees are satisfied at the time the charge is assessed to the customer's account.

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

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

Statement Regarding Forward-Looking Statements

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

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

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following additional risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:

	·	demand for our products and services may decline, making it difficult to grow assets and income;
	·	if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
	·	collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
	·	our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
	·	the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
	·	as a result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
	·	changes in legislation or regulation, including government initiatives affecting the financial services industry, including, but not limited to, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act;
	·	our cyber security risks are increased as the result of an increase in the number of employees working remotely;
	·	we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
	·	FDIC premiums may increase if the agency experiences additional resolution costs.

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 cash equivalents), 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, 2020, we had net income of $115,000 compared to net income of $315,000 for the three months ended June 30, 2019. The period over period $200,000 decrease in net income was due to an increase in non-interest expense and an increase in the provision for loan losses partially offset by an increase in net interest income and an increase in non-interest income.

For the six months ended June 30, 2020, we had net income of $292,000 compared to net income of $545,000 for the six months ended June 30, 2019. The period over period $253,000 decrease in net income was due to an increase in non-interest expense and an increase in the provision for loan losses partially offset by an increase in net interest income and an increase in non-interest income.

At June 30, 2020, we had $237.8 million in consolidated assets, an increase of $27.6 million, or 13.1%, from $210.2 million at December 31, 2019. During the first six months of 2020, we continued to focus on loan production, particularly with respect to commercial and industrial loans with growth primarily in PPP loans (as described below), and we increased our balance sheet liquidity by increasing cash and cash equivalents and securities available-for-sale in our response to the COVID-19 pandemic.

COVID-19 Pandemic Response

General

Our financial condition and performance, as well as the ability of our borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services that we offer, are all highly dependent on the business environment in the market areas in which we operate and in the United States as a whole. During the first quarter of 2020, an outbreak of a novel strain of coronavirus (“COVID-19”), which was originally identified in Wuhan, China, has spread to a number of countries around the world, including the United States. COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had, are currently having and may for some time continue to have a destabilizing effect on financial markets and economic activity. The COVID-19 pandemic has severely restricted the level of economic activity in the Bank’s market areas. In response to the COVID-19 pandemic, the New York State governor has taken preventative and protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed non-essential. While some of these restrictions have been relaxed during the second quarter of 2020, the consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees in the market areas in which we operate.

The Bank’s branches have remained open to serve our customers and local communities during the pandemic with strict social distancing protocols in place. We have encouraged our customers to visit us via drive-thru lanes and to utilize our mobile banking, online banking and ATM services to promote social distancing. In-person lobby visits are by appointment only. To protect the health of everyone, many employees are working remotely and cleaning protocols have been enhanced across all locations.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). We are a qualified SBA lender and we enrolled in the PPP by completing the required documentation. The PPP program was subsequently modified by legislation during the second quarter of 2020.

Paycheck Protection Program

Loan Modification/Troubled Debt Restructurings

As of April 30, 2020, we had received requests to modify 192 loans aggregating $30.2 million, primarily consisting of the deferral of principal and interest payments for a 90-day period. Details with respect to actual loan modifications as of June 30, 2020 are as follows:

Type of Loan	Number of Loans		Balance		Weighted Average Interest Rate
	(Dollars in thousands)
Mortgage loans on real estate:
One-to four-family first lien residential		116	$	16,232		4.10	%
Residential construction		-		-		-
Home equity loans and lines of credit		12		632		3.25	%
Commercial		41		11,574		5.80	%
Total mortgage loans on real estate		169		28,438		4.77	%
Commercial and industrial		22		1,758		5.31	%
Consumer loans		1		14		4.50	%
Total loans		192	$	30,210		4.80	%

Type of Loan	Number of Loans		Balance		Weighted Average Interest Rate
	(Dollars in thousands)
Mortgage loans on real estate:
One-to four-family first lien residential		11	$	2,179		4.16	%
Residential construction		-		-		-
Home equity loans and lines of credit		-		-		-
Commercial		20		5,209		5.47	%
Total mortgage loans on real estate		31		7,388		5.08	%
Commercial and industrial		5		685		5.50	%
Consumer loans		-		-		-
Total loans		36	$	8,073		5.12	%

Allowance for Loan Losses

Liquidity and Capital Resources

The Paycheck Protection Program Lending Facility (“Facility”), authorized under section 13(3) of the Federal Reserve Act, is intended to facilitate lending by eligible financial institutions to small businesses under the Paycheck Protection Program (“PPP Loans”) of the “CARES Act”. Under the Facility, the Federal Reserve Banks (“Reserve Banks”) will lend to eligible financial institutions on a non-recourse basis, taking PPP Loans as collateral. All depository institutions that originate PPP Loans are eligible to borrow under the Facility. Only PPP Loans guaranteed by the “SBA” are eligible to serve as collateral for the Facility. The maturity date of an extension of credit under the Facility will equal the maturity date of the PPP Loan pledged to secure the extension of credit. The maturity date of the Facility’s extension of credit will be accelerated if the underlying PPP Loan goes into default and the Bank sells the PPP Loan to the SBA to realize on the SBA guarantee. The maturity date of the Facility’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by the eligible financial institutions from the SBA. Extensions of credit under the Facility will be made at a rate of 35 basis points. There are no fees associated with the Facility. PPP Loans pledged as collateral to secure extensions of credit under the Facility will be valued at the principal amount of the PPP Loan. The principal amount of an extension of credit under the Facility will be equal to the principal amount of the PPP Loan pledged as collateral to secure the extension of credit. Extensions of credit under the Facility are made without recourse to the Bank. Under section 1102 of the CARES Act, a PPP Loan will be assigned a risk weight of zero percent under the risk-based capital rules of the OCC.

As of June 30, 2020, the Bank has secured $17.1 million through the Paycheck Protection Program Lending Facility to fund PPP Loans.

The Company has suspended its stock repurchase program to conserve capital during the COVID-19 pandemic crisis.

As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact our operational and financial performance. The full extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted. We have increased our allowance for loan losses as a direct consequence of the COVID-19 pandemic. At this point, the full extent to which COVID-19 may impact our financial condition or results of operations is uncertain.

Summary of Significant Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated 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 consolidated 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, 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,
	(Unaudited)
	2020								2019
	Average Outstanding Balance			Interest		Yield/ Rate ⁽⁴⁾			Average Outstanding Balance			Interest		Yield/ Rate ⁽⁴⁾
	(Dollars in thousands)
Interest-earning assets:

Loans	$	175,840		$	1,961		4.46	%	$	162,977		$	1,974		4.84	%
Available-for-sale securities		33,028			186		2.25	%		26,469			175		2.64	%
FHLB Stock		2,944			48		6.52	%		2,873			44		6.13	%
Other interest-earning assets		8,211			2		0.10	%		1,383			4		1.16	%
Total interest-earning assets	$	220,023			2,197		3.99	%		193,702			2,197		4.54	%
Noninterest-earning assets		13,138								9,759
Total assets	$	233,161							$	203,461

Interest-bearing liabilities:

NOW accounts	$	17,973		$	6		0.13	%	$	14,574		$	5		0.14	%
Regular savings and demand club accounts		23,558			5		0.08	%		22,443			5		0.09	%
Money market accounts		27,559			72		1.05	%		16,071			39		0.97	%
Certificates of deposit and retirement accounts		65,447			217		1.33	%		78,094			396		2.03	%
Total interest-bearing deposits		134,537			300		0.89	%		131,182			445		1.36	%
FHLB and PPLF Borrowings		46,557			199		1.71	%		33,135			216		2.61	%
Total interest-bearing liabilities		181,094			499		1.10	%		164,317			661		1.61	%
Noninterest-bearing deposits		26,294								15,651
Other non-interest-bearing liabilities		4,395								4,270
Total liabilities		211,783								184,238
Stockholders' equity		21,378								19,223
Total liabilities and stockholders' equity	$	233,161							$	203,461

Net interest income				$	1,698							$	1,536
Net interest rate spread ⁽¹⁾							2.89	%							2.93	%
Net interest-earning assets ⁽²⁾	$	38,929							$	29,669
Net interest margin ⁽³⁾							3.09	%							3.17	%
Average interest-earning assets to average interest-bearing liabilities		121	%							118	%


	(1)	Interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

(2)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by total interest-earning assets.

	(4)	Annualized.

	For the Six Months Ended June 30,
	(Unaudited)
	2020								2019
	Average Outstanding Balance			Interest		Yield/ Rate ⁽⁴⁾			Average Outstanding Balance			Interest		Yield/ Rate ⁽⁴⁾
	(Dollars in thousands)
Interest-earning assets:

Loans	$	170,411		$	3,879		4.55	%	$	161,530		$	3,860		4.78	%
Available-for-sale securities		30,225			359		2.38	%		26,742			351		2.63	%
FHLB Stock		2,894			99		6.84	%		2,871			96		6.69	%
Other interest-earning assets		5,354			8		0.30	%		1,347			11		1.78	%
Total interest-earning assets		208,884			4,345		4.16	%		192,490			4,318		4.49	%
Noninterest-earning assets		13,000								9,257
Total assets	$	221,884							$	201,747

Interest-bearing liabilities:

NOW accounts	$	16,441		$	12		0.15	%	$	14,537		$	11		0.15	%
Regular savings and demand club accounts		22,783			11		0.10	%		22,278			10		0.09	%
Money market accounts		25,867			144		1.11	%		15,562			70		0.90	%
Certificates of deposit and retirement accounts		69,342			518		1.49	%		78,440			780		1.99	%
Total interest-bearing deposits		134,433			685		1.02	%		130,817			871		1.33	%
FHLB and PPLF Borrowings		40,152			385		1.92	%		33,316			415		2.49	%
Total interest-bearing liabilities		174,585			1,070		1.23	%		164,133			1,286		1.57	%
Noninterest-bearing deposits		21,894								15,406
Other non-interest-bearing liabilities		3,941								3,026
Total liabilities		200,420								182,565
Stockholders' equity		21,464								19,182
Total liabilities and stockholders' equity	$	221,884							$	201,747

Net interest income				$	3,275							$	3,032
Net interest rate spread ⁽¹⁾							2.93	%							2.92	%
Net interest-earning assets ⁽²⁾	$	34,299							$	27,044
Net interest margin ⁽³⁾							3.14	%							3.15	%
Average interest-earning assets to average interest-bearing liabilities		120	%							117	%

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

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,
	2020 vs. 2019									2020 vs. 2019
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to					Total Increase
	Volume			Rate			(Decrease)			Volume		Rate			(Decrease)
	(In thousands)									(In thousands)
Interest-earning assets:
Loans	$	156		$	(169	)	$	(13	)	$	212	$	(193	)	$	19
Available-for-sale securities		43			(32	)		11			46		(38	)		8
FHLB Stock		1			3			4			1		2			3
Other interest-earning assets		20			(22	)		(2	)		36		(39	)		(3	)

Total interest-earning assets	$	220		$	(220	)	$	-		$	295	$	(268	)	$	27

Interest-bearing liabilities:
NOW accounts	$	1		$	-		$	1		$	-	$	1		$	1
Regular savings and demand club accounts		-			-			-			-		1			1
Money market accounts		28			5			33			1		73			74
Certificates of deposit and retirement accounts		(64	)		(115	)		(179	)		-		(262	)		(262	)
Total deposits		(35	)		(110	)		(145	)		1		(187	)		(186	)

FHLB and PPLF Borrowings		88			(105	)		(17	)		25		(55	)		(30	)

Total interest-bearing liabilities		53			(215	)		(162	)		26		(242	)		(216	)

Change in net interest income	$	167		$	(5	)	$	162		$	270	$	(27	)	$	243

Comparison of Financial Condition at June 30, 2020 and December 31, 2019

Total assets increased $27.6 million, or 13.1%, to $237.8 million at June 30, 2020 from $210.2 million at December 31, 2019. The increase was primarily due to increases in securities available-for-sale, loans and cash and cash equivalents.

Cash and cash equivalents increased $7.2 million, or 232.8%, to $10.3 million at June 30, 2020 from $3.1 million at December 31, 2019 due to an increase in commercial transaction accounts funded by PPP Loans. Personal savings and money market accounts also increased due to a reduction in consumer spending during the COVID-19 pandemic.

Securities available-for-sale increased by $9.7 million, or 34.6%, to $37.6 million at June 30, 2020 from $28.0 million at December 31, 2019. The increase was primarily due to purchases of $13.9 million in new securities, partially offset by principal repayments of $1.4 million, sales of $3.3 million, unrealized gains of $540,000 and premium amortization of $127,000. The new purchases included fifteen municipal bonds and one Ginnie Mae mortgage backed security. Municipal bond purchases included $7.7 million in short term bond anticipation notes maturing in 2020. The municipal purchases were to invest excess liquidity and improve net interest margin. The sales included one collateralized mortgage obligation and three mortgage-backed securities. Net gain on the sales of securities for the six months ended June 30, 2020 totaled $35,000. The net gain of securities was the result of re-balancing our investment portfolio when market conditions are favorable.

Loans increased $9.7 million, or 5.9%, to $174.1 million at June 30, 2020 from $164.4 million at December 31, 2019, reflecting an increase in primarily commercial and industrial loans. Commercial and industrial loans increased $16.1 million, or 95.96%, to $32.9 million at June 30, 2020, from $16.8 million at December 31, 2019. In the first six months of 2020, we increased our portfolio of commercial loans primarily due to the Payroll Protection Program (“PPP Loans”) servicing our existing business customers as well as new business customers in our local markets. We are offering the new customers who have PPP Loans with us additional commercial products and serves to enhance the relationships. Residential real estate loans decreased $5.9 million, or 5.9%, to $93.4 million at June 30, 2020, from $99.2 million at December 31, 2019. The decrease in residential real-estate loans was the result of our origination and sales of new residential real-estate loans and refinancing and sale of existing residential real-estate loans.

Premises and equipment decreased by $108,000, or 2.0%, to $5.3 million at June 30, 2020, from $5.4 million December 31, 2019, due to depreciation of our buildings, furniture, fixtures and equipment.

Total deposits increased $7.0 million, or 4.6%, to $158.9 million at June 30, 2020 from $151.9 million at December 31, 2019. Demand deposit accounts, NOW accounts, savings accounts and money market accounts all increased partially offset by a decrease in certificates of deposit accounts. Certificates of deposit accounts decreased $16.8 million, or 21.7%, to $60.5 million at June 30, 2020, from $77.2 million at December 31, 2019. The managed decrease in certificates of deposit was due to a large number of jumbo certificates of deposit from other out of state depository institutions as well as CDARS maturing, and is part of our strategy to reduce our dependence on wholesale funding. Demand deposit accounts increased $9.7 million, or 58.3%, to $26.4 million at June 30, 2020 from $16.7 million at December 31, 2019. Money market accounts increased $7.4 million, or 35.8%, to $28.2 million at June 30, 2020 from $20.7 million at December 31, 2019. NOW accounts increased $4.4 million, or 29.1%, to $19.3 million at June 30, 2020 from $15.0 million at December 31, 2020. The increase in demand deposit and money market accounts was in part due to proceeds from PPP Loans deposited into commercial transaction and money market accounts. We also have experienced a reluctance of depositors to spend federal financial aid provided by the CARES Act in response to the COVID-19 pandemic.

Total borrowings from the FHLBNY increased $1.5 million, or 4.6%, to $34.4 million at June 30, 2020 from $32.9 million at December 31, 2019 as we increased borrowings to fund commercial loan growth.

Borrowings from the Paycheck Protection Liquidity Facility at the Federal Reserve Bank of New York. (“PPLF”) totaled $17.1 million at June 30, 2020 using PPP Loans to secure the borrowings. As the PPP Loans mature, are forgiven or sold to the SBA, the PPLF borrowings will be paid-off.

Total stockholders’ equity increased $742,000, or 3.5%, to $21.8 million at June 30, 2020 from $21.1 million at December 31, 2019. The increase was primarily due to the decrease in accumulated other comprehensive loss which decreased $426,000, or 20.3%, to $1.7 million at June 30, 2020 from $2.1 million at December 31, 2019. Net income of $292,000 and a decrease of unearned ESOP shares of $12,000 and an increase in additional paid-in capital of $12,000 related to the Company’s stock incentive plan also contributed to the increase in stockholders’ equity.

Comparison of Operating Results for the Three Months Ended June 30, 2020 and 2019

General. Net income decreased $200,000, or 63.5%, to $115,000 for the three months ended June 30, 2020, from $315,000 for the three months ended June 30, 2019. The decrease was due to an increase in the provision for loan losses, and an increase in non-interest expense partially offset by increases in net interest income and non-interest income.

Interest Income. Interest income for the three months ended June 30, 2020 was the same as the three months ended June 30, 2019 or $2.2 million. Our average balance of interest-earning assets increased $26.3 million, or 13.6%, to $220.0 million for the three months ended June 30, 2020 from $193.7 million for the three months ended June 30, 2019 due primarily to increases in the average balance of loans, available-for-sale securities and other interest-earning assets. The average yield on interest-earning assets decreased 55 basis points to 3.99% for the three months ended June 30, 2020 from 4.54% for the three months ended June 30, 2019 as our interest-earning assets repriced with the lower interest rate environment.

Interest income on loans decreased $13,000 to $2.0 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 due to the decrease in average yield on loans nearly offset by an increase in the average balance on loans. Our average yield on loans decreased 38 basis points to 4.46% for the three months ended June 30, 2020 from 4.84% for the three months ended June 30, 2019, as our adjustable rate loans repriced with the declining interest rate environment. Our average balance of loans increased $12.9 million, or 7.9%, to $175.8 million for the three months ended June 30, 2020 from $163.0 million for the three months ended June 30, 2019. The increase in the average balance of loans resulted from our continued emphasis on growing our commercial loan portfolio with the addition of $18.1 million in PPP Loans.

Interest income on available-for-sale securities increased $11,000, or 6.3%, to $186,000 for the three months ended June 30, 2020 from $175,000 for the three months ended June 30, 2019 due primarily to an increase in the average balance on available-for-sale securities nearly offset by the decrease in the average yield on available-for-sale securities. The average balance of available-for-sale securities increased $6.6 million, or 24.8%, to $33.0 million for the three months ended June 30, 2020 from $26.5 million for the three months ended June 30, 2019. The increase in the average balance of available-for-sale securities was due in part to the purchase of municipal bonds. The average yield we earned on available-for-sale securities decreased 39 basis points to 2.25% for the three months ended June 30, 2020 from 2.64% for the three months ended June 30, 2019 primarily as a result of the repricing of floating rate securities to the three-month LIBOR in a declining interest rate environment.

Interest Expense. Interest expense decreased $162,000, or 24.5%, to $499,000 for the three months ended June 30, 2020 from $661,000 for the three months ended June 30, 2019, due to a decrease in the average rates on deposits and borrowings partially offset by an increase in the average balance of interest-bearing liabilities. Our average rate on interest-bearing liabilities decreased 51 basis points to 1.10% for the three months ended June 30, 2020 from 1.61% for the three months ended June 30, 2019 primarily as a result of the decrease in the average rates on certificates of deposit and borrowings. Our average balance of interest-bearing liabilities increased $16.8 million, or 10.2%, to $181.1 million for the three months ended June 30, 2020 from $164.3 million for the three months ended June 30, 2019 due primarily to increases in the average balance of deposits and borrowings.

Interest expense on deposits decreased $145,000, or 32.6%, to $300,000 for the three months ended June 30, 2020 from $445,000 for the three months ended June 30, 2019 due to the decrease in the average rate paid on deposits. The average rate paid on deposits decreased by 47 basis points to 0.89%, for the three months ended June 30, 2020 from 1.36% for the three months ended June 30, 2019, primarily reflecting lower rates paid on certificates of deposit and CDARS certificates of deposit. The average rate of certificates of deposit decreased by 70 basis points to 1.33% for the three months ended June 30, 2020 from 2.03% for the three months ended June 30, 2019. The average balance of certificates of deposit decreased by $12.6 million or, 16.2%, to $65.4 million for the three months ended June 30, 2020 from $78.1 million for the three months ended June 30, 2019 due to the declining interest rate environment. The average rate paid on money market accounts increased eight basis points for the three months ended June 30, 2020 to 1.05% from 0.97% for the three months ended June 30, 2019.

Interest expense on borrowings decreased $17,000, or 7.9%, to $199,000 for the three months ended June 30, 2020 from $216,000 for the three months ended June 30, 2019. The decrease in interest expense on borrowings reflected the decrease in the average rate of FHLBNY and PPLF borrowings which decreased by 90 basis points to 1.71% for the three months ended June 30, 2020 from 2.61% for the three months ended June 30, 2019. The rate paid on PPLF borrowings is 0.35%. The average balance of borrowings with the FHLBNY and the FRBNY increased in the second quarter of 2020 as compared to the second quarter of 2019 by $13.4 million, or 40.5%, to $46.6 million for the three months ended June 30, 2020 from $33.1 million for the three months ended June 30, 2019. The average rate on FHLBNY borrowings decreased due to a declining interest rate environment. The average balance of PPLF borrowings at the FRBNY was $11.1 million for the three months ended June 30, 2020.

Net Interest Income. Net interest income increased $162,000, or 10.6%, to $1.7 million for the three months ended June 30, 2020 from $1.5 million for the three months ended June 30, 2019, primarily as a result of the growth in net interest-earning assets which increased $9.3 million, or 31.2%, to $38.9 million for the three months ended June 30, 2020 from $29.7 million for the three months ended June 30, 2019. Our net interest rate spread decreased by four basis points to 2.89% for the three months ended June 30, 2020 from 2.93% for the three months ended June 30, 2019, and our net interest margin decreased by eight basis points to 3.09% for the three months ended June 30, 2020 from 3.17% for the three months ended June 30, 2019, primarily due to a decrease in the average yield on interest earning assets partially offset by the decrease in the average rate on interest-bearing liabilities.

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 estimated at the consolidated statement of financial condition. 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. We have also evaluated the economic effects of the COVID-19 global pandemic. 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 three months ended June 30, 2020 of $180,000 compared to a $55,000 provision for loan losses for the three months ended June 30, 2019. The increase in the provision for the three months ended June 30, 2020 was the result of the latest evaluation of our loan portfolio and the potential effects of the COVID-19 pandemic. We experienced net charge-offs of $46,000 which was related to two commercial loans for the three months ended June 30, 2020. There were no charge-offs in the second quarter of 2019. The allowance for loan losses was $1.4 million, or 0.82% of net loans outstanding, at June 30, 2020, $1.2 million, or 0.75% of net loans outstanding, at December 31, 2019 and $1.21 million, or 0.70% of net loans outstanding, at June 30, 2019.

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, 2020 and June 30, 2019. 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 increased $21,000, or 9.2%, to $249,000 for the three months ended June 30, 2020 from $228,000 for the three months ended June 30, 2019. The increase was primarily due to an increase in income from sales of investments and net gains on sales of residential real estate offset by decreases in service fees, income from financial services and fee income. Net gains on the sales of residential real estate increased by $49,000, or 350.0%, to $63,000 for the three months ended June 30, 2020 from $14,000 for the three months ended June 30, 2019. Net gains on the sales of residential real estate increased, as a result of an increased focus on selling loans originated.Net gain on the sales of two mortgage backed securities totaling $1.9 million was $33,000 for the three months ended June 30, 2020. No net gains were recorded for the same period ended June 30, 2019. Service fees decreased $6,000, or 17.6%, to $28,000 for the three months ended June 30, 2020 from $34,000 for the three months ended June 30, 2019. Income from financial services decreased $40,000, or 40.4%, to $59,000 for the three months ended June 30, 2020 from $99,000 for the three months ended June 30, 2019. Fee income decreased $16,000, or 23.5%, to $52,000 for the three months ended June 30, 2020 from $68,000 for the three months ended June 30, 2019. The decrease in financial services income was due to a decrease in transactional fee income due to the COVID-19 international pandemic. Fee income decreased due to decreased transactions caused by the COVID-19 international pandemic.

Non-Interest Expense. Non-interest expense increased by $295,000, or 22.3%, to $1.6 million for the three months ended June 30, 2020 from $1.3 million for the three months ended June 30, 2019. The increase was primarily due to increased expenses related to, compensation and employee benefits, core processing, premises and equipment, advertising and other expenses . Compensation and employee benefits increased $50,000, or 6.5%, to $817,000 for the three months ended June 30, 2020 from $767,000 for the three months ended June 30, 2019. The increase in compensation and employee benefits was the result of staffing our new Bridgeport branch in Madison County, New York beginning in the fourth quarter of 2019. Premises and equipment expense increased by $33,000, or 25.6%, to $162,000 for the three months ended June 30, 2020 from $129,000 for the three months ended June 30, 2019. The increase was primarily due to depreciation and maintenance expenses related to the opening of our Bridgeport branch in the fourth quarter of 2019. Advertising increased $16,000, or 35.6%, for the three months ended June 30, 2020 to $61,000 from $45,000 for the three months ended June 30, 2019 as we focused on marketing in Madison County for our new location in Bridgeport, New York. Core processing increased by $25,000, or 18.4%, to $161,000 for the three months ended June 30, 2020 from $136,000 for the three months ended June 30, 2019. The increase was due to an increase in debit card expense with the addition of new transaction account customers. Other expenses increased by $86,000, or 74.8%, to $201,000 for the three months ended June 30, 2020 from $115,000 for the three months ended June 30, 2019. The increase in other expenses was the result of a pre-payment penalty on a FHLB advance for $108,000. The advance of $1.1 million had a maturity date of September 26, 2023, and a rate of 3.37%. The pre-payment of the advance will have a positive effect on the net interest margin in future periods.

Income Tax Expense. We incurred income tax expense of $36,000 and $73,000 for the three months ended June 30, 2020 and 2019, respectively. The decrease in income tax expense for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 was due to the decrease in income before provision for income taxes and the evaluation of our temporary and permanent tax differences.

Comparison of Operating Results for the Six Months Ended June 30, 2020 and 2019

General. Net income decreased $253,000, or 46.4%, to $292,000 for the six months ended June 30, 2020, from $545,000 for the six months ended June 30, 2019. The decrease was due to increases in non-interest expense and provision for loan losses partially offset by increases in net interest income and non-interest income.

Interest Income. Interest income increased $27,000, or 0.6%, to $4.3 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. Our average balance of interest-earning assets increased $16.4 million, or 8.5%, to $208.9 million for the six months ended June 30, 2020 from $192.5 million for the six months ended June 30, 2019 due primarily to an increase in the average balance of loans. The average yield on interest-earning assets decreased 33 basis points to 4.16% for the six months ended June 30, 2020 from 4.49% for the six months ended June 30, 2019 as our interest-earning assets repriced with the declining interest rate environment.

Interest income on loans increased $19,000, or 0.5%, to $3.9 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 due to the increase in the average balance of loans. Our average balance of loans increased $8.9 million, or 5.5%, to $170.4 million for the six months ended June 30, 2020 from $161.5 million for the six months ended June 30, 2019. The increase in the average balance of loans resulted from our continued emphasis on commercial lending with the addition of $18.1 million in PPP Loans in response to the global COVID-19 pandemic. Our average yield on loans decreased 23 basis points to 4.55% for the six months ended June 30, 2020 from 4.78% for the six months ended June 30, 2019, as our adjustable rate loans repriced downward in the declining interest rate environment.

Interest income on available-for-sale securities increased $8,000 or 2.3%, to $359,000 for the six months ended June 30, 2020 from $351,000 for the six months ended June 30, 2019 due primarily to an increase in the average balance of available-for-sale securities. The average balance of available-for-sale securities increased $3.5 million, or 13.0%, to $30.2 million for the six months ended June 30, 2020 from $26.7 million for the six months ended June 30, 2019 due to increased purchases during the six months ended June 30, 2020.The average yield we earned on available-for-sale securities decreased 25 basis points to 2.38% for the six months ended June 30, 2020 from 2.63% for the six months ended June 30, 2019 primarily as a result of faster premium amortization resulting from increasing prepayment speeds on mortgage-backed securities and the repricing of floating rate securities to the three month LIBOR in a declining rate environment.

Interest Expense. Interest expense decreased $216,000, or 16.8%, to $1.1 million for the six months ended June 30, 2020 from $1.3 million for the six months ended June 30, 2019, due to decreases in interest expense on certificates of deposit and borrowings. Our average rate on interest-bearing liabilities decreased 34 basis points to 1.23% for the six months ended June 30, 2020 from 1.57% for the six months ended June 30, 2019 primarily as a result of decreases in the average rates on FHLBNY borrowings and certificates of deposit. Our average balance of interest-bearing liabilities increased $10.5 million, or 6.4%, to $174.6 million for the six months ended June 30, 2020 from $164.1 million for the six months ended June 30, 2019 due primarily to increases in the average balances of money market accounts, NOW accounts and borrowings.

Interest expense on deposits decreased $186,000, or 21.4%, to $685,000 for the six months ended June 30, 2020 from $871,000 for the six months ended June 30, 2019 due to the decrease in the average rate paid on deposits. The average rate paid on deposits decreased to 1.02% for the six months ended June 30, 2020 from 1.33% for the six months ended June 30, 2019, primarily reflecting lower rates paid on certificates of deposit. The average rate of certificates of deposit decreased by 50 basis points to 1.49% for the six months ended June 30, 2020 from 1.99% for the six months ended June 30, 2019. In addition, the average balance of certificates of deposit decreased by $9.1 million, or 11.6%, to $69.3 million for the six months ended June 30, 2020 from $78.4 million for the six months ended June 30, 2019. The average balance of NOW accounts increased $1.9 million, or 13.1%, to $16.4 million for the six months ended June 30, 2020 from $14.5 million for the six months ended June 30, 2019. The average rate of NOW accounts remained the same at 15 basis points for the six months ended June 30, 2020 and 2019. Money market accounts increased $10.3 million or 66.2%, to $25.9 million for the six months ended June 30, 2020 from $15.6 million for the six months ended June 30, 2019. We have experienced growth in transaction and money market accounts due to the COVID-19 pandemic as consumers and businesses are reluctant to spend.

Interest expense on borrowings decreased $30,000, or 7.2%, to $385,000 for the six months ended June 30, 2020 from $415,000 for the six months ended June 30, 2019. The decrease in interest expense on borrowings reflected the decrease in the average rate of FHLBNY borrowings and the FRBNY PPLF which decreased by 57 basis points to 1.92% for the six months ended June 30, 2020 from 2.49% for the six months ended June 30, 2019. The average balance of borrowings with the FHLBNY increased in the first half of 2020 as compared to the first half of 2019 by $1.5 million from $32.9 million to $34.4 million to fund our asset growth. The average rate on borrowings decreased due to the decrease in interest rates.

Net Interest Income. Net interest income increased $243,000, or 8.0%, to $3.3 million for the six months ended June 30, 2020 from $3.0 million for the six months ended June 30, 2019, primarily as a result of the growth in net interest-earning assets which increased $7.3 million, or 26.8%, from $27.0 million for the six months ended June 30, 2019 to $34.3 million for the six months ended June 30, 2020. Our net interest rate spread increased by one basis point to 2.93% for the six months ended June 30, 2020 from 2.92% for the six months ended June 30, 2019, and our net interest margin decreased by one basis point to 3.14% for the six months ended June 30, 2020 from 3.15% for the six months ended June 30, 2019.

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 estimated at the date of the consolidated statement of financial condition. 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. We have also evaluated the economic effects of the COVID-19 global pandemic. 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, 2020 of $260,000 as compared to $90,000 for the six months ended June 30, 2019. The increase in the provision for the six months ended June 30, 2020 was the result of the latest evaluation of our loan portfolio and the potential economic effects of the COVID-19 pandemic. We had net-charge-offs of $68,000 for the six months ended June 30, 2020 as compared to $169,000 in net charge-offs for the six months ended June 30, 2019. The allowance for loan losses was $1.4 million, or 0.82% of net loans outstanding at June 30, 2020. The allowance for loan losses was $1.2 million or 0.75% of net loans outstanding at December 31, 2019.

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, 2020 and June 30, 2019. 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 by expanding the relationship of existing clients and adding new clients.

Non-Interest Income. Non-interest income increased $44,000, or 11.0%, to $446,000 for the six months ended June 30, 2020 from $402,000 for the six months ended June 30, 2019. The increase was primarily due to an increase in income from sales of mortgages and investments partially offset by a decrease in financial services income. Net gains on sales of available-for-sale securities were $35,000 for the six months ended June 30, 2020. There were no net gains on available-for-sale securities sales in the six months ended June 30, 2019. Net gains on the sale of residential mortgage loans increased $33,000 for the six months ended June 30, 2020, or 94.3%, to $68,000 for the six months ended June 30, 2020 from $35,000 for the six months ended June 30, 2019. Income from financial services decreased $21,000, or 14.1%, to $128,000 for the six months ended June 30, 2020 from $149,000 for the six months ended June 30, 2019. Net gains on the sales of residential real estate increased, as a result of an increased focus on selling loans originated. The net gain of securities was the result of re-balancing our investment portfolio when market conditions are favorable. The decrease in financial services income was due to a decrease in transactional fee income due to the COVID-19 international pandemic.

Non-Interest Expense. Non-interest expense increased by $423,000, or 15.8%, to $3.1 million for the six months ended June 30, 2020 from $2.7 million for the six months ended June 30, 2019. The increase was primarily due to increased expenses related to, compensation and employee benefits, premises and equipment, advertising and other expenses partially offset by a decrease in professional fees. Compensation and employee benefits increased $115,000, or 7.7%, to $1.6 million for the six months ended June 30, 2020 from $1.5 million for the six months ended June 30, 2019. The increase in compensation and employee benefits was the result of staffing our new Bridgeport branch in Madison County, New York beginning in the fourth quarter of 2019. Premises and equipment expense increased by $108,000, or 43.0%, to $359,000 for the six months ended June 30, 2020 from $251,000 for the six months ended June 30, 2019. The increase was primarily due to depreciation and maintenance expenses related to the opening of our Bridgeport branch in the fourth quarter of 2019. Advertising increased $40,000, or 43.0%, to $133,000 for the six months ended June 30, 2020 from $93,000, for the six months ended June 30, 2019 as we focused on marketing in Madison County for our new location in Bridgeport, New York. Other expenses increased by $81,000, or 38.8%, to $290,000 for the six months ended June 30, 2020 from $209,000 for the six months ended June 30, 2019. The increase in other expenses was the result of a pre-payment penalty on a FHLB advance for $108,000. The advance of $1.1 million had a maturity date of September 26, 2023, and a rate of 3.37%. The pre-payment of the advance will have a positive effect on the net interest margin in future periods .

Income Tax Expense. We incurred income tax expense of $71,000 and $124,000 for the six months ended June 30, 2020 and 2019, respectively. The decrease in income tax expense for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 was due to the decrease in income before provision for income taxes and the evaluation of our temporary and permanent tax differences.

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 $2.2 million or 0.94% of total assets, at June 30, 2020 and $1.9 million, or 0.90% of total assets, at December 31, 2019 due to increased non-accrual loans in residential real estate and commercial loans. Non-accrual residential loans increased due to two mortgages totaling $550,000, one has been subsequently sold and the other is current as of July 31, 2020. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. We have two commercial real estate loans totaling $1.0 million at June 30, 2020 that are non-accruing troubled debt restructurings included in the table below and paying as agreed at the dates indicated.

	At June 30, 2020			At December 31, 2019
	(Unaudited)
	(In thousands)
Non-accrual loans:
Residential:
One- to four-family	$	1,004		$	709
Home equity loans and lines of credit		99			-
Construction		-			-
Commercial real estate		1,007			962
Commercial and industrial		134			-
Consumer and other		1			-
Total non-accrual loans	$	2,245		$	1,671

Accruing loans 90 days or more past due:
Residential:
One- to four-family		-			148
Home equity loans and lines of credit		-			56
Construction		-			-
Commercial real estate		-			-
Commercial and industrial		-			-
Consumer and other		-			8
Total accruing loans 90 days or more past due	$	-		$	212
Total non-performing loans		2,245			1,883
Real estate owned		-			-
Total non-performing assets	$	2,245		$	1,883

Other non-performing loans to total loans		1.28	%		1.14	%
Total non-performing loans to total assets		0.94	%		0.90	%
Total non-performing assets to total assets		0.94	%		0.90	%

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,
	2020			2019
	(Unaudited)
	(In thousands)

Balance at beginning of period	$	1,241		$	1,234

Charge-offs:
Residential:
One- to four-family		-			146
Home equity loans and lines of credit		-			-
Construction		-			16
Commercial real estate		14			-
Commercial and industrial		46			-
Consumer and other		8			7
Total charge-offs		68			169

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		68			169
Provision for loan losses		260			35

Balance at end of period	$	1,433		$	1,100

Ratios:
Net charge-offs to average loans outstanding		0.04	%		0.10	%
Allowance for loan losses to non-performing loans at end of period		63.46	%		181.60	%
Allowance for loan losses to total loans at end of period		0.81	%		0.70	%

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, 2020, we had a $82.4 million line of credit with the FHLBNY and a $2.5 million line of credit with Zions Bank. At June 30, 2020, we had $34.4 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, 2020 .

The Board of 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, 2020.

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, 2020, cash and cash equivalents totaled $10.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $37.6 million at June 30, 2020.

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, 2020, totaled $45.0 million, or 28.32%, 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, 2020, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at June 30, 2020. 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, 2020, we had outstanding commitments to originate loans of $384,000. 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 consolidated 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, 2020, 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

The Company did not repurchase any shares of its common stock during the three and six months ended June 30, 2020.

The Company’s Board of Directors authorized its first stock repurchase program on October 21, 2018 to acquire up to 98,946 shares, or 5.0% of the Company’s then outstanding common stock. As of June 30, 2020, 32,982 shares of common stock remain to be repurchased under the program. Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Company.

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, 2020, 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, 2020	/s/ Joseph G. Vitale
	Joseph G. Vitale
	President and Chief Executive Officer

August 14, 2020	/s/ Vincent J. Fazio
	Vincent J. Fazio
	Executive Vice President and Chief Financial Officer

Seneca Financial Corp. - FORM 10-Q - August 14, 2020

Attached files

Seneca Financial Corp. Reports