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 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
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 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 endedJune 30, 2020 , we had net income of$115,000 compared to net income of$315,000 for the three months endedJune 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 endedJune 30, 2020 , we had net income of$292,000 compared to net income of$545,000 for the six months endedJune 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.
AtJune 30, 2020 , we had$237.8 million in consolidated assets, an increase of$27.6 million , or 13.1%, from$210.2 million atDecember 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. 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. 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 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. The PPP program was subsequently modified by legislation during the second quarter of 2020. 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
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 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 ofJune 30, 2020 are as follows: Weighted Average Number Interest Type of Loan of Loans Balance 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:
Weighted
Average
Number Interest
Type of Loan of Loans Balance 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
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.
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
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. 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 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.
41
For the Three Months Ended June 30,
(Unaudited)
2020 2019
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate (4) Balance Interest 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.
42
For the Six Months Ended June 30,
(Unaudited)
2020 2019
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate (4) Balance Interest 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.
43
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 Total Increase (Decrease) Due Total
to Increase to 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 44
Comparison of Financial Condition at
Total assets increased$27.6 million , or 13.1%, to$237.8 million atJune 30, 2020 from$210.2 million atDecember 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 atJune 30, 2020 from$3.1 million atDecember 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 atJune 30, 2020 from$28.0 million atDecember 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 oneGinnie 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 endedJune 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 atJune 30, 2020 from$164.4 million atDecember 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 atJune 30, 2020 , from$16.8 million atDecember 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 atJune 30, 2020 , from$99.2 million atDecember 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
Total deposits increased$7.0 million , or 4.6%, to$158.9 million atJune 30, 2020 from$151.9 million atDecember 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 atJune 30, 2020 , from$77.2 million atDecember 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 atJune 30, 2020 from$16.7 million atDecember 31, 2019 . Money market accounts increased$7.4 million , or 35.8%, to$28.2 million atJune 30, 2020 from$20.7 million atDecember 31, 2019 . NOW accounts increased$4.4 million , or 29.1%, to$19.3 million atJune 30, 2020 from$15.0 million atDecember 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
Borrowings from the Paycheck Protection Liquidity Facility at theFederal Reserve Bank of New York . ("PPLF") totaled$17.1 million atJune 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 atJune 30, 2020 from$21.1 million atDecember 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 atJune 30, 2020 from$2.1 million atDecember 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. 45
Comparison of Operating Results for the Three Months Ended
General. Net income decreased$200,000 , or 63.5%, to$115,000 for the three months endedJune 30, 2020 , from$315,000 for the three months endedJune 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 endedJune 30, 2020 was the same as the three months endedJune 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 endedJune 30, 2020 from$193.7 million for the three months endedJune 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 endedJune 30, 2020 from 4.54% for the three months endedJune 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 endedJune 30, 2020 as compared to the three months endedJune 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 endedJune 30, 2020 from 4.84% for the three months endedJune 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 endedJune 30, 2020 from$163.0 million for the three months endedJune 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 endedJune 30, 2020 from$175,000 for the three months endedJune 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 endedJune 30, 2020 from$26.5 million for the three months endedJune 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 endedJune 30, 2020 from 2.64% for the three months endedJune 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 endedJune 30, 2020 from$661,000 for the three months endedJune 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 endedJune 30, 2020 from 1.61% for the three months endedJune 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 endedJune 30, 2020 from$164.3 million for the three months endedJune 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 endedJune 30, 2020 from$445,000 for the three months endedJune 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 endedJune 30, 2020 from 1.36% for the three months endedJune 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 endedJune 30, 2020 from 2.03% for the three months endedJune 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 endedJune 30, 2020 from$78.1 million for the three months endedJune 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 endedJune 30, 2020 to 1.05% from 0.97% for the three months endedJune 30, 2019 . Interest expense on borrowings decreased$17,000 , or 7.9%, to$199,000 for the three months endedJune 30, 2020 from$216,000 for the three months endedJune 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 endedJune 30, 2020 from 2.61% for the three months endedJune 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 endedJune 30, 2020 from$33.1 million for the three months endedJune 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 endedJune 30, 2020 . Net Interest Income. Net interest income increased$162,000 , or 10.6%, to$1.7 million for the three months endedJune 30, 2020 from$1.5 million for the three months endedJune 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 endedJune 30, 2020 from$29.7 million for the three months endedJune 30, 2019 . Our net interest rate spread decreased by four basis points to 2.89% for the three months endedJune 30, 2020 from 2.93% for the three months endedJune 30, 2019 , and our net interest margin decreased by eight basis points to 3.09% for the three months endedJune 30, 2020 from 3.17% for the three months endedJune 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. 46 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 endedJune 30, 2020 of$180,000 compared to a$55,000 provision for loan losses for the three months endedJune 30, 2019 . The increase in the provision for the three months endedJune 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 endedJune 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, atJune 30, 2020 ,$1.2 million , or 0.75% of net loans outstanding, atDecember 31, 2019 and$1.21 million , or 0.70% of net loans outstanding, atJune 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 endedJune 30, 2020 andJune 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, 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$21,000 , or 9.2%, to$249,000 for the three months endedJune 30, 2020 from$228,000 for the three months endedJune 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 endedJune 30, 2020 from$14,000 for the three months endedJune 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 endedJune 30, 2020 . No net gains were recorded for the same period endedJune 30, 2019 . Service fees decreased$6,000 , or 17.6%, to$28,000 for the three months endedJune 30, 2020 from$34,000 for the three months endedJune 30, 2019 . Income from financial services decreased$40,000 , or 40.4%, to$59,000 for the three months endedJune 30, 2020 from$99,000 for the three months endedJune 30, 2019 . Fee income decreased$16,000 , or 23.5%, to$52,000 for the three months endedJune 30, 2020 from$68,000 for the three months endedJune 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 endedJune 30, 2020 from$1.3 million for the three months endedJune 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 endedJune 30, 2020 from$767,000 for the three months endedJune 30, 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$33,000 , or 25.6%, to$162,000 for the three months endedJune 30, 2020 from$129,000 for the three months endedJune 30, 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$16,000 , or 35.6%, for the three months endedJune 30, 2020 to$61,000 from$45,000 for the three months endedJune 30, 2019 as we focused on marketing inMadison County for our new location inBridgeport, New York . Core processing increased by$25,000 , or 18.4%, to$161,000 for the three months endedJune 30, 2020 from$136,000 for the three months endedJune 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 endedJune 30, 2020 from$115,000 for the three months endedJune 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 ofSeptember 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 endedJune 30, 2020 and 2019, respectively. The decrease in income tax expense for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 was due to the decrease in income before provision for income taxes and the evaluation of our temporary and permanent tax differences. 47
Comparison of Operating Results for the Six Months Ended
General. Net income decreased$253,000 , or 46.4%, to$292,000 for the six months endedJune 30, 2020 , from$545,000 for the six months endedJune 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 endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Our average balance of interest-earning assets increased$16.4 million , or 8.5%, to$208.9 million for the six months endedJune 30, 2020 from$192.5 million for the six months endedJune 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 endedJune 30, 2020 from 4.49% for the six months endedJune 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 endedJune 30, 2020 as compared to the six months endedJune 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 endedJune 30, 2020 from$161.5 million for the six months endedJune 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 endedJune 30, 2020 from 4.78% for the six months endedJune 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 endedJune 30, 2020 from$351,000 for the six months endedJune 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 endedJune 30, 2020 from$26.7 million for the six months endedJune 30, 2019 due to increased purchases during the six months endedJune 30 , 2020.The average yield we earned on available-for-sale securities decreased 25 basis points to 2.38% for the six months endedJune 30, 2020 from 2.63% for the six months endedJune 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 endedJune 30, 2020 from$1.3 million for the six months endedJune 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 endedJune 30, 2020 from 1.57% for the six months endedJune 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 endedJune 30, 2020 from$164.1 million for the six months endedJune 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 endedJune 30, 2020 from$871,000 for the six months endedJune 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 endedJune 30, 2020 from 1.33% for the six months endedJune 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 endedJune 30, 2020 from 1.99% for the six months endedJune 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 endedJune 30, 2020 from$78.4 million for the six months endedJune 30, 2019 . The average balance of NOW accounts increased$1.9 million , or 13.1%, to$16.4 million for the six months endedJune 30, 2020 from$14.5 million for the six months endedJune 30, 2019 . The average rate of NOW accounts remained the same at 15 basis points for the six months endedJune 30, 2020 and 2019. Money market accounts increased$10.3 million or 66.2%, to$25.9 million for the six months endedJune 30, 2020 from$15.6 million for the six months endedJune 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 endedJune 30, 2020 from$415,000 for the six months endedJune 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 endedJune 30, 2020 from 2.49% for the six months endedJune 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. 48 Net Interest Income. Net interest income increased$243,000 , or 8.0%, to$3.3 million for the six months endedJune 30, 2020 from$3.0 million for the six months endedJune 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 endedJune 30, 2019 to$34.3 million for the six months endedJune 30, 2020 . Our net interest rate spread increased by one basis point to 2.93% for the six months endedJune 30, 2020 from 2.92% for the six months endedJune 30, 2019 , and our net interest margin decreased by one basis point to 3.14% for the six months endedJune 30, 2020 from 3.15% for the six months endedJune 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 endedJune 30, 2020 of$260,000 as compared to$90,000 for the six months endedJune 30, 2019 . The increase in the provision for the six months endedJune 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 endedJune 30, 2020 as compared to$169,000 in net charge-offs for the six months endedJune 30, 2019 . The allowance for loan losses was$1.4 million , or 0.82% of net loans outstanding atJune 30, 2020 . The allowance for loan losses was$1.2 million or 0.75% of net loans outstanding atDecember 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 endedJune 30, 2020 andJune 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, 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 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 endedJune 30, 2020 from$402,000 for the six months endedJune 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 endedJune 30, 2020 . There were no net gains on available-for-sale securities sales in the six months endedJune 30, 2019 . Net gains on the sale of residential mortgage loans increased$33,000 for the six months endedJune 30, 2020 , or 94.3%, to$68,000 for the six months endedJune 30, 2020 from$35,000 for the six months endedJune 30, 2019 . Income from financial services decreased$21,000 , or 14.1%, to$128,000 for the six months endedJune 30, 2020 from$149,000 for the six months endedJune 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 endedJune 30, 2020 from$2.7 million for the six months endedJune 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 endedJune 30, 2020 from$1.5 million for the six months endedJune 30, 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$108,000 , or 43.0%, to$359,000 for the six months endedJune 30, 2020 from$251,000 for the six months endedJune 30, 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$40,000 , or 43.0%, to$133,000 for the six months endedJune 30, 2020 from$93,000 , for the six months endedJune 30, 2019 as we focused on marketing inMadison County for our new location inBridgeport, New York . Other expenses increased by$81,000 , or 38.8%, to$290,000 for the six months endedJune 30, 2020 from$209,000 for the six months endedJune 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 ofSeptember 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 endedJune 30, 2020 and 2019, respectively. The decrease in income tax expense for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was due to the decrease in income before provision for income taxes and the evaluation of our temporary and permanent tax differences. 49 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, atJune 30, 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. Non-accrual residential loans increased due to two mortgages totaling$550,000 , one has been subsequently sold and the other is current as ofJuly 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 atJune 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 - 8Total 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 %
50
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 - 146Home 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 %
51
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. AtJune 30, 2020 , we had a$82.4 million line of credit with the FHLBNY and a$2.5 million line of credit withZions Bank . AtJune 30, 2020 , we had$34.4 million in outstanding borrowings from the FHLBNY. We have not borrowed against the line of credit withZions Bank during the six months endedJune 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. AtJune 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 atJune 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 atJune 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. AtJune 30, 2020 , we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized atJune 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. AtJune 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 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. 52
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