SENECA FINANCIAL CORP. 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
policies of the
· 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 ofunemployment 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
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
·
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. 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 endedMarch 31, 2020 , we had net income of$177,000 compared to net income of$230,000 for the three months endedMarch 31, 2019 . The period over period$53,000 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
37 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 inthe 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 inWuhan, China , has spread to a number of countries around the world, includingthe 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, theNew 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. These restrictions and other 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 onMarch 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 theSmall 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. Paycheck Protection Program
An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly "payroll costs;" or (2)$10.0 million . PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. 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 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As ofApril 30, 2020 , we had received approximately 194 applications for up to$16.9 million of loans under the PPP. We intend to limit 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 ofDecember 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 betweenMarch 1, 2020 and the earlier of eitherDecember 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Similarly, theFinancial 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. 38 As ofApril 30, 2020 , we had received requests to modify 190 loans aggregating$29.7 million , primarily consisting of the deferral of principal and interest payments for a 90-day period. Details with respect to actual loan modifications as ofApril 30, 2020 are as follows: Weighted Number of Average Type of Loan Loans Balance Interest Rate (In thousands)
Mortgage loans on real estate:
One-to four-family first lien residential 101$ 14,500 4.1 % Residential construction - - - Home equity loans and lines of credit 13 786 3.3 % Commercial 44 12,011 5.8 % Total mortgage loans on real estate 158
27,297 4.8 % Commercial and industrial 31 2,405 5.3 % Consumer loans 1 14 4.5 % Total loans 190$ 29,716 4.9 % Allowance for Loan Losses 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 ofMarch 31, 2020 and expect to do so for future periods due to the COVID-19 pandemic.
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 April 30, 2020 , the Bank has secured $11.6 million through the Paycheck
Protection Program Lending Facility to fund PPP Loans. Additional PPP loans will
also be funded through the Facility.
The Company has suspended its stock repurchase program to conserve liquidity 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 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. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain. 39
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 withU.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. OnApril 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.
40 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 table sets 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.
41
For the Three Months Ended March 31,
2020 2019
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
(In Thousands)Interest-earning assets:
Loans$ 164,983 $ 1,918 4.65 %$ 159,084 $ 1,886 4.74 %
Available-for-sale
securities 27,421 173 2.52 % 27,014 176 2.61 % FHLB Stock 2,845 51 7.17 % 2,868 52 7.25 % Other interest-earning assets 2,496 6 0.96 % 1,312 7 2.13 % Total interest-earning assets 197,745 2,148 4.34 % 190,278 2,121 4.46 % Noninterest-earning assets 12,862
8,258
Total assets $ 210,607 $ 198,536
Interest-bearing
liabilities:
NOW accounts $ 14,910 $ 6 0.16 % $ 14,026 $ 6 0.17 %
Regular savings and demand
club accounts 22,008 6 0.11 % 22,112 5 0.09 %
Money market accounts 24,174 72 1.19 % 15,053 31 0.82 %
Certificates of deposit and
retirement accounts 73,237 301 1.64 % 77,786 385 1.97 %
Total interest-bearing
deposits 134,329 385 1.15 % 128,977 426 1.32 %
FHLB Borrowings 33,747 186 2.20 % 34,257 199 2.32 %
Total interest-bearing
liabilities 168,076 571 1.36 % 163,234 625 1.53 %Noninterest-bearing deposits 17,494
13,832
Other non-interest bearing
liabilities 4,014 1,687
Total liabilities 189,584 178,753
Stockholders' equity 21,023 19,783
Total liabilities and
stockholders' equity $ 210,607 $ 198,536
Net interest income $ 1,577 $ 1,496
Net interest rate spread (1) 2.99 % 2.93 %
Net interest-earning assets
(2) $ 29,669 $ 27,044
Net interest margin (3) 3.19 % 3.14 %
Average interest-earning
assets to averageinterest-bearing liabilities 118 %
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.
42
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 March 31,
2020 vs. 2019
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ 70 $ (38 ) $ 32
Available-for-sale securities 3 (6 ) (3 )
FHLB Stock - (1 ) (1 )
Other interest-earning assets 6 (7 ) (1 )
Total interest-earning assets $ 79 $ (52 ) $ 27
Interest-bearing liabilities:
NOW accounts $ - $ - $ -
Regular savings and demand club accounts - 1 1
Money market accounts - 41 41
Certificates of deposit and retirement accounts -
(84 ) (84 )
Total deposits - (42 ) (42 )
FHLB Borrowings 18 (30 ) (12 )
Total interest-bearing liabilities 18 (72 ) (54 ) Change in net interest income $ 61 $
20 $ 81
43
Comparison of Financial Condition at
Total assets increased$1.6 million , or 0.7%, to$211.8 million atMarch 31, 2020 from$210.2 million atDecember 31, 2019 . The increase was primarily due to increases in cash and cash equivalents. Loans decreased$1.2 million , or 0.7%, to$163.2 million atMarch 31, 2020 from$164.4 million atDecember 31, 2019 , reflecting a decrease in residential real estate loans. Residential real estate loans decreased$2.9 million , or 2.9%, to$96.3 million atMarch 31, 2020 , from$99.2 million atDecember 31, 2019 . The decrease in residential real-estate loans was the result of not having a residential loan origination officer however subsequently one has been hired. Commercial real-estate loans increased$1.5 million , or 4.4%, to$35.9 million atMarch 31, 2020 , from$34.4 million atDecember 31, 2019 . In the first three months of 2020, we increased our portfolio of commercial real estate loans
to increase earnings. Securities available-for-sale increased by$503,000 , or 1.8%, to$28.5 million atMarch 31, 2020 from$28.0 million atDecember 31, 2019 . The increase was primarily due to purchases of$3.1 million in new securities, partially offset by principal repayments of$534,000 , sales of$1.4 million , unrealized losses of$635,000 and premium amortization of$51,000 . The new purchases included nine municipal bonds. The sales included one agency bond and two collateralized mortgage obligations. Net gain on the sales of securities for the three months endedMarch 31, 2020 totaled$2,000 . The net gain of securities is the result of re-balancing our investment portfolio when market conditions are favorable.
Premises and equipment decreased by
Cash and cash equivalents increased$1.5 million , or 48.9%, to$4.6 million atMarch 31, 2020 from$3.1 million atDecember 31, 2019 due to a decrease in loan demand for the first quarter of 2020. Total deposits decreased$588,000 , or 0.4%, to$151.3 million atMarch 31, 2020 from$151.9 million atDecember 31, 2019 . The decrease was primarily due to a decrease in certificates of deposit accounts partially offset by an increase in demand deposit and money market accounts. Certificates of deposit accounts decreased$7.9 million , or 10.3%, to$69.3 million atMarch 31, 2020 , from$77.2 million atDecember 31, 2019 . The decrease in certificates of deposit is due to a large number of jumbo certificates of deposit from other out of state depository institutions maturing. Demand deposit accounts increased$1.1 million , or 6.6%, to$17.8 million atMarch 31, 2020 from$16.7 million atDecember 31, 2019 . Money market accounts increased$5.7 million , or 27.7%, to$26.5 million atMarch 31, 2020 from$20.7 million atDecember 31, 2019 . The increase of demand deposit and money market accounts was primarily due to special advertising promotions and sales efforts during the first quarter of 2020 targeting commercial accounts in our new market ofMadison County, New York .
Total borrowings from the FHLBNY increased
Total stockholders' equity decreased$313,000 , or 1.5%, to$20.8 million atMarch 31, 2020 from$21.1 million atDecember 31, 2019 . The decrease was primarily due to the investment portfolio accumulated other comprehensive loss which increased$502,000 , or 23.9%, to$2.6 million atMarch 31, 2020 from$2.1 million atDecember 31, 2019 partially offset by net income of$177,000 and a decrease of unearned ESOP shares of$6,000 and an increase in additional paid-in capital of$6,000 related to the Company's stock incentive plan. 44
Comparison of Operating Results for the Three Months Ended
General. Net income decreased$53,000 , or 23.0%, to$177,000 for the three months endedMarch 31, 2020 , from$230,000 for the three months endedMarch 31, 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 increased$27,000 , or 1.3%, to$2.1 million for the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 . Our average balance of interest-earning assets increased$7.5 million , or 3.9%, to$197.7 million for the three months endedMarch 31, 2020 from$190.3 million for the three months endedMarch 31, 2019 due primarily to increases in the average balance of loans and available-for-sale securities. The average yield on interest-earning assets decreased 12 basis points to 4.34% for the three months endedMarch 31, 2020 from 4.46% for the three months endedMarch 31, 2019 as our interest-earning assets repriced with the lower interest rate environment. Interest income on loans increased$32,000 , or 1.7%, to$1.9 million for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to the increase in the average balance of loans partially offset by a decrease in the average yield on loans. Our average balance of loans increased$5.9 million , or 3.7%, to$165.0 million for the three months endedMarch 31, 2020 from$159.1 million for the three months endedMarch 31, 2019 . The increase in the average balance of loans resulted from our continued emphasis on growing our commercial real estate loan portfolio. Our average yield on loans decrease 9 basis points to 4.65% for the three months endedMarch 31, 2020 from 4.74% for the three months endedMarch 31, 2019 , as our adjustable rate loans repriced with the declining interest rate environment. Interest income on available-for-sale securities decreased$3,000 , or 1.7%, to$173,000 for the three months endedMarch 31, 2020 from$176,000 for the three months endedMarch 31, 2019 due primarily to a decrease in the average yield of available-for-sale securities offset by an increase in the average balance of available-for- sale securities. The average yield we earned on available-for-sale securities decreased nine basis points to 2.52% for the three months endedMarch 31, 2020 from 2.61% for the three months endedMarch 31, 2019 primarily as a result of the repricing of floating rate securities to the three-month LIBOR in a declining interest rate environment. The average balance of available-for-sale securities increased$407,000 , or 1.5%, to$27.4 million for the three months endedMarch 31, 2020 from$27.0 million for the three months endedMarch 31, 2019 . The increase in the average balance of available-for-sale securities was due in part to the purchase of municipal bonds. Interest Expense. Interest expense decreased$54,000 , or 8.6%, to$571,000 for the three months endedMarch 31, 2020 from$625,000 for the three months endedMarch 31, 2019 , due to a decrease in rate on deposits and borrowings partially offset by an increase in volume. Our average rate on interest-bearing liabilities decreased 17 basis points to 1.36% for the three months endedMarch 31, 2020 from 1.53% for the three months endedMarch 31, 2019 primarily as a result of the decrease in the average rate on certificate of deposits and borrowings. Our average balance of interest-bearing liabilities increased$4.8 million , or 3.0%, to$168.1 million for the three months endedMarch 31, 2020 from$163.2 million for the three months endedMarch 31, 2019 due primarily to increases in the average balance of deposits. Interest expense on deposits decreased$41,000 , or 9.6%, to$385,000 for the three months endedMarch 31, 2020 from$426,000 for the three months endedMarch 31, 2019 due to the decrease in the rate paid on deposits. The average rate paid on deposits decreased by 17 basis points to 1.15%, for the three months endedMarch 31, 2020 from 1.32% for the three months endedMarch 31, 2019 , primarily reflecting lower rates paid on certificates of deposit and CDARS certificates of deposit. The average rate of certificates of deposit decreased by 33 basis points to 1.64% for the three months endedMarch 31, 2020 from 1.97% for the three months endedMarch 31, 2019 . The average balance of certificates of deposit decreased by$4.5 million or, 5.8%, to$73.2 million for the three months endedMarch 31, 2020 from$77.8 million for the three months endedMarch 31, 2019 due to the declining interest rate environment. The average rate paid on money market accounts increased 37 basis points for the three months endedMarch 31, 2020 to 1.19% from 0.82% for the three months endedMarch 31, 2019 . Interest expense on borrowings decreased$13,000 , or 6.5%, to$186,000 for the three months endedMarch 31, 2020 from$199,000 for the three months endedMarch 31, 2019 . The decrease in interest expense on borrowings reflected the decrease in the average rate of FHLBNY borrowings which decreased by 12 basis points to 2.20% for the three months endedMarch 31, 2020 from 2.32% for the three months endedMarch 31, 2019 . The average balance of borrowings with the FHLBNY decreased in the first quarter of 2020 as compared to the first quarter of 2019 by$510,000 , or 1.5%, to$33.7 million for the three months endedMarch 31, 2020 from$34.2 million for the three months endedMarch 31, 2019 . FHLBNY borrowings decreased as the average balances of our interest-bearing and noninterest-bearing deposit accounts increased. The average rate on FHLBNY borrowings decreased due to a declining interest rate environment. Net Interest Income. Net interest income increased$81,000 , or 5.4%, to$1.6 million for the three months endedMarch 31, 2020 from$1.5 million for the three months endedMarch 31, 2019 , primarily as a result of the growth in net interest-earning assets which increased$2.6 million , or 9.7%, to$29.7 million for the three months endedMarch 31, 2020 from$27.0 million for the three months endedMarch 31, 2019 . Our net interest rate spread increased by six basis points to 2.99% for the three months endedMarch 31, 2020 from 2.93% for the three months endedMarch 31, 2019 , and our net interest margin increased by five basis points to 3.19% for the three months endedMarch 31, 2020 from 3.14% for the three months endedMarch 31, 2019 , primarily due to an increase in the average balance of interest earning assets which outpaced the increase in the average balance of interest bearing liabilities. 45 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. 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 endedMarch 31, 2020 of$80,000 compared to a$35,000 provision for loan losses for the three months endedMarch 31, 2019 . The increase in the provision for the three months endedMarch 31, 2020 was the result of the latest evaluation of our loan portfolio. The increase in the provision was primarily due to an increase in the general provision related to the significant deterioration in the economic conditions as a result of the COVID-19 global pandemic. We experienced net charge-offs of$22,000 of which$14,000 was related to two commercial real estate loan for the three months endedMarch 31, 2020 . There were$169,000 charge-offs in the first quarter of 2019. The allowance for loan losses was$1.3 million , or 0.79% of net loans outstanding, atMarch 31, 2020 ,$1.2 million , or 0.75% of net loans outstanding, atDecember 31, 2019 and$1.1 million , or 0.68% of net loans outstanding, atMarch 31, 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 endedMarch 31, 2020 andMarch 31, 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, theOffice 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$23,000 , or 13.2%, to$197,000 for the three months endedMarch 31, 2020 from$174,000 for the three months endedMarch 31, 2019 . The increase was primarily due to an increase in income from financial services and fee income offset by a decrease in net gains on sale of residential real estate. Income from financial services increase$19,000 or, 38%, to$69,000 for the three months endedMarch 31, 2020 from$50,000 for the three months endedMarch 31, 2019 . Fee income increased$19,000 , or 33.9%, to$75,000 for the three months endedMarch 31, 2020 from$56,000 for the three months endedMarch 31, 2019 . Net gains on the sale of residential real estate decreased by$16,000 , or 76.2%, to$5,000 for the three months endedMarch 31, 2020 from$21,000 for the three months endedMarch 31, 2019 . The increase in financial services income was due to an increase in assets under management. Fee income increased because of our promotions targeting transaction accounts and our new market inMadison County, New York in the first quarter of 2020. Net gains on the sale of residential real estate decreased as a result of a decrease in loans originated. We did not have a residential loan origination officer in 2019 but have since hired one. Non-Interest Expense. Non-interest expense increased by$128,000 , or 9.5%, to$1.5 million for the three months endedMarch 31, 2020 from$1.4 million for the three months endedMarch 31, 2019 . The increase was primarily due to increased expenses related to, compensation and employee benefits, premises and equipment, and advertising partially offset by a decrease in core processing and professional fees. Compensation and employee benefits increased$65,000 , or 9.0%, to$785,000 for the three months endedMarch 31, 2020 from$720,000 for the three months endedMarch 31, 2019 . The increase in compensation and employee benefits was the result of staffing our newBridgeport branch inMadison County, New York beginning in the fourth quarter of 2019. Premises and equipment expense increased by$75,000 , or 61.5%, to$197,000 for the three months endedMarch 31, 2020 from$122,000 for the three months endedMarch 31, 2019 . The increase was primarily due to depreciation and maintenance expenses related to the opening of ourBridgeport branch in the fourth quarter of 2019. Advertising increased 50.0% to$72,000 , for the three months endedMarch 31, 2020 , as compared to the prior year's first quarter, as we focused on marketing inMadison County for our new location inBridgeport, New York . Core processing decreased by$16,000 , or 8.1%, to$182,000 for the three months endedMarch 31, 2020 from$198,000 for the three months endedMarch 31, 2019 . The decrease in core processing was the result of bringing our call center in-house from being outsourced in 2019. Professional fees decreased by$20,000 , or 23.3%, to$66,000 for the three months endedMarch 31, 2020 , from$86,000 for the three months endedMarch 31, 2019 . Professional fees were higher in the first quarter of 2019 due to the adoption of our equity incentive plan and fees related to the receipt of the consent of our former public accounting firm in connection with the filing of the 2018 Annual Report on Form 10-K with theSecurities and Exchange Commission . Income Tax Expense. We incurred income tax expense of$35,000 and$51,000 for the three months endedMarch 31, 2020 and 2019, respectively, resulting in effective tax rates of 16.5% and 18.2%, respectively. The decrease in income tax expense for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 is calculated projecting the income before tax for the year 2020 and the evaluation of our temporary and permanent tax differences. 46 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$2.1 million or 1.0% of total assets, atMarch 31, 2020 and$1.9 million , or 0.90% of total assets, atDecember 31, 2019 due to increased non-accrual loans in residential real estate and commercial loans. 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$939,000 atMarch 31, 2020 that are non-accruing troubled debt restructurings included in the table below and paying as agreed at the dates indicated. At December At March 31, 2020 31, 2019 (Unaudited) (Dollars in thousands) Non-accrual loans: Residential: One- to four-family $ 821 $ 709
Home equity loans and lines of credit
99 - Construction - - Commercial real estate 939 962 Commercial and industrial 134 - Consumer and other 1 - Total non-accrual loans $ 1,994$ 1,671 Accruing loans 90 days or more past due: Residential: One- to four-family 122 148 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 $
122 $ 212 Total non-performing loans 2,116 1,883 Real estate owned - - Total non-performing assets $ 2,116$ 1,883
Other non-performing loans to total loans 1.29 % 1.14 % Total non-performing loans to total assets 1.00 % 0.90 % Total non-performing assets to total assets
1.00 % 0.90 %
47
The following table sets forth activity in our allowance for loan losses for the
periods indicated.
At or for the Three Months Ended
March 31,
2020 2019
(Unaudited)
(Dollars 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 - -
Consumer and other 8 7
Total charge-offs 22 169
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 22 169
Provision for loan losses 80 35
Balance at end of period $ 1,299 $ 1,100
Ratios:Net charge-offs to average loans outstanding 0.01 % 0.11 % Allowance for loan losses to non-performing loans at end of period 61.39 % 182.42 % Allowance for loan losses to total loans at end of period 0.79 %
0.68 %
48
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. AtMarch 31, 2020 , we had a$86.5 million line of credit with the FHLBNY and a$2.5 million line of credit withZions Bank . AtMarch 31, 2020 , we had$36.5 million in outstanding borrowings from the FHLBNY. We have not borrowed against the line of credit withZions Bank during the three months endedMarch 31, 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 March
31, 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. AtMarch 31, 2020 , cash and cash equivalents totaled$4.6 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$28.5 million atMarch 31, 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 atMarch 31, 2020 , totaled$52.3 million , or 34.5%, 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. AtMarch 31, 2020 , we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized atMarch 31, 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. AtMarch 31, 2020 , we had outstanding commitments to originate loans of$388,000 . 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 withU.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. 49
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