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EX-32 - EXHIBIT 32 - Sunnyside Bancorp, Inc.t1700775_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Sunnyside Bancorp, Inc.t1700775_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Sunnyside Bancorp, Inc.t1700775_ex31-1.htm
EX-21 - EXHIBIT 21 - Sunnyside Bancorp, Inc.t1700775_ex21.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal ended December 31, 2016.

OR

 

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

 

For the transition period from _______________ to _______________.

 

Commission file number: 000-55005

 

SUNNYSIDE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   46-3001280

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

56 Main Street, Irvington, New York   10533
(Address of principal executive offices)   (Zip Code)

 

Registrant's telephone number, including area code: (914) 591-8000

 

Securities registered pursuant to Section 12(b) of the Act:         None

 

(Title of each class to be registered)  

(Name of each exchange on which

each class is to be registered)

 

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

 

Common Stock, par value $0.01 per share

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨     NO x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨     NO x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x     NO ¨

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x     NO ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨ Accelerated filer  ¨
   
Non-accelerated filer  ¨ Smaller reporting company  x
(Do not check if a smaller reporting company)  

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $8,880,745 at June 30, 2016.

 

As of March 28, 2017, there were 793,500 issued and outstanding shares of the Registrant’s Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Certain information required by Items 10, 11, 12, 13 and 14 is incorporated by reference into Part III hereof from portions of the Proxy Statement for the Registrant’s 2017 Annual Meeting of Shareholders.

 

 

 

 

 

 

TABLE OF CONTENTS

 

ITEM 1. Business 1
     
ITEM 1A. Risk Factors 36
     
ITEM 1B. Unresolved Staff Comments 36
     
ITEM 2. Properties 36
     
ITEM 3. Legal Proceedings 36
     
ITEM 4. Mine Safety Disclosures. 36
     
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36
     
ITEM 6. Selected Financial Data 38
     
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
     
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 50
     
ITEM 8. Financial Statements and Supplementary Data 50
     
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 50
     
ITEM 9A Controls and Procedures 51
     
ITEM 9B. Other Information 52
     
ITEM 10. Directors, Executive Officers and Corporate Governance 52
     
ITEM 11. EXECUTIVE COMPENSATION 52
     
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 52
     
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 52
     
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 53
     
ITEM 15. Exhibits and Financial Statement Schedules 53
     
ITEM 16. FORM 10-K SUMMARY 54

 

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PART I

 

ITEM 1.          Business

 

This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations;

 

·statements regarding our business plans, prospects, growth and operating strategies;

 

·statements regarding the asset quality of our loan and investment portfolios; and

 

·estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·general economic conditions, either nationally or in our market areas, that are worse than expected;

 

·competition among depository and other financial institutions;

 

·inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

·adverse changes in the securities markets;

 

·changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·our ability to enter new markets successfully and capitalize on growth opportunities;

 

·our ability to successfully integrate de novo or acquired branches, if any;

 

·our ability to execute on our business strategy to increase commercial real estate and multi-family lending and commercial lending;

 

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·changes in consumer spending, borrowing and savings habits;

 

·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

·changes in our organization, compensation and benefit plans; and

 

·changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

General

 

Sunnyside Bancorp, Inc.

 

Sunnyside Bancorp, Inc. (“Sunnyside Bancorp” or the “Company”) was incorporated in the State of Maryland in March 2013 for the purpose of becoming the savings and loan holding company for Sunnyside Federal Savings and Loan Association of Irvington (“Sunnyside Federal” or the “Bank”), upon consummation of the Bank’s mutual to stock conversion. The conversion was consummated in July 2013 at which time Sunnyside Bancorp became the registered savings and loan holding company of the Bank. To date, other than holding all of the issued and outstanding stock of Sunnyside Federal and making a loan to the Bank’s employee stock ownership plan, we have not engaged in any material business.

 

At December 31, 2016, Sunnyside Bancorp had consolidated assets of $90.3 million, liabilities of $79.0 million and equity of $11.2 million.

 

Sunnyside Bancorp is a registered savings and loan holding company and is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System. Sunnyside Bancorp’s executive and administrative office is located at 56 Main Street, Irvington, New York 10533, and our telephone number at this address is (914) 591-8000. Our website address is www.sunnysidefederal.com. Information on this website should not be considered a part of this annual report.

 

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Sunnyside Federal Savings and Loan Association of Irvington

 

Sunnyside Federal is a federal savings association that was founded in 1930. In July 2013, we completed our mutual to stock conversion thereby becoming a stock savings bank and becoming the wholly owned subsidiary of Sunnyside Bancorp. Sunnyside Federal conducts business from its full-service banking office located in Irvington, New York which is located in Westchester County, New York approximately 25 miles north of New York City. We consider our deposit market area to be the Westchester County, New York towns of Irvington, Tarrytown, Sleepy Hollow, Hastings, Dobbs Ferry and Ardsley-on-Hudson, and consider our lending area to be primarily Westchester, Putnam and Rockland Counties, New York.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans and commercial and multi-family real estate loans, and, to a much more limited extent, commercial loans, student loans, home equity lines of credit and other loans (consisting primarily of loans secured by deposits and marketable securities). At December 31, 2016, $24.8 million, or 51.3%, of our total loan portfolio was comprised of owner-occupied, one- to four-family residential real estate loans, $15.8 million, or 32.6%, was comprised of commercial real estate and multi-family mortgage loans and $7.8 million, or 16.1%, was comprised of commercial loans, student loans, home equity and passbook loans.

 

We also invest in securities, which consist primarily of U.S. government agency obligations and mortgage-backed securities and to a lesser extent, securities of states, counties and political subdivisions.

 

We offer a variety of deposit accounts, including certificate of deposit accounts, money market accounts, savings accounts, NOW accounts and individual retirement accounts. We can also borrow from the Federal Home Loan Bank and had $3.0 million in advances at December 31, 2016.

 

For the year ended December 31, 2016, we had a net loss of $117,000 compared to a net loss of $80,000 for the year ended December 31, 2015. Our current business strategy includes increasing our asset size, diversifying our loan portfolio to increase our non-residential lending, including commercial and multi-family real estate lending, commercial lending, student loan originations and increasing our non-interest income, as ways to improve our profitability in future periods.

 

The majority of our current executive management team has been with Sunnyside Federal since 2010. Since that time, we have begun to shift Sunnyside Federal’s strategy to diversify our traditional thrift focus into a more commercial bank style of operation with a broadened base of financial products and services while emphasizing superior customer service. While residential real estate lending has been, and will remain, the most important part of our operations, we intend to diversify our focus on non-residential lending, including commercial and multi-family real estate lending, commercial lending, including SBA lending and student loan financing.

 

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Sunnyside Federal is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Our executive and administrative office is located at 56 Main Street, Irvington, New York 10533, and our telephone number at this address is (914) 591-8000. Our website address is www.sunnysidefederal.com. Information on this website should not be considered a part of this annual report.

 

Market Area and Competition

 

We conduct our operations from our full-service banking office located in Irvington, Westchester County, New York, which is located approximately 25 miles north of New York City. Our primary deposit market area includes Irvington and the contiguous towns of Tarrytown, Sleepy Hollow, Hastings, Dobbs Ferry and Ardsley-on-Hudson, all of which are located in Westchester County, New York. Our primary lending market area includes Westchester, Putnam and Rockland counties, New York. We will, on occasion, make loans secured by properties located outside of our primary lending market, especially to borrowers with whom we have an existing relationship and who have a presence within our primary lending area.

 

At December 31, 2016, $24.8 million, or 51.3%, of our total loan portfolio was comprised of owner-occupied, one-to four family residential real estate loans. Accordingly, a downturn in the residential real estate market in Westchester, Putnam, or Rockland Counties could significantly affect our results of operations.

 

Westchester County is primarily a suburban community and is the second wealthiest county in the State of New York. Some key statistics, according to the US Census Bureau, on Westchester County for the period of 2011 through 2015 are provided below:

 

·The homeownership rate in Westchester County was 61.5%, compared to 53.6% in the State of New York;

 

·The median home value was $506,900, compared to $283,400 in the State of New York;

 

·The median household income in Westchester County was $83,958, compared to $59,269 in the State of New York;

 

·Approximately 46.7% of the population of Westchester County held a bachelor’s degree or higher, compared to 34.2% in the State of New York; and

 

·Approximately 10.1% of the population of Westchester County had incomes below poverty level, compared to 15.4% in the State of New York.

 

Sunnyside Federal also makes loans on a regular basis to residents of Putnam and Rockland Counties, New York. Below are some key statistics, according to the US Census Bureau, on the economic outlook of Putnam and Rockland Counties for the period of 2011 through 2015:

 

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·The homeownership rate in Putnam County and Rockland County was 82.0% and 68.9%, respectively, compared to 53.6% in the State of New York;

 

·The median home value in Putnam County and Rockland County was $354,900 and $419,100, respectively, compared to $283,400 in the State of New York;

 

·The median household income in Putnam County and Rockland County was $96,148 and $84,855, respectively, compared to $59,269 in the State of New York;

 

·Approximately 37.9% and 40.3% of the population of Putnam County and Rockland County, respectively, held a bachelor’s degree or higher, compared to 34.2% in the State of New York; and

 

·Approximately 6.0% and 14.0% of the population of Putnam County and Rockland County, respectively, had incomes below poverty level, compared to 15.4% in the State of New York.

 

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our position as a community bank.

 

We are a small community savings institution and as of June 30, 2016 (the latest date for which information is available), our market share was 0.09% of total FDIC-insured deposits in Westchester, making us the 28th largest out of 36 financial institutions in Westchester County based upon deposit share as of that date.

 

Business Strategy

 

Our current business strategy is to operate as a community bank dedicated to serving the needs of our consumer and business customers and emphasizing personalized and efficient customer service. Highlights of our current business strategy include:

 

·growing our assets and liabilities by increasing our presence in the communities we serve and expanding our service delivery channels;

 

·utilizing our management’s commercial banking experience by diversifying our lending operations to increase our emphasis on commercial and multi-family real estate lending commercial lending and student loan originations;

 

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·maintaining our strong asset quality profile through conservative loan underwriting;

 

·increasing our non-interest income through the origination and sale of one-to four-family residential real estate loans and the guaranteed-portion of SBA loans;

 

·managing interest rate risk by emphasizing the origination of shorter-term loans for retention in our portfolio;

 

·continuing to attract and retain customers in our market area and build our “core” deposits consisting of demand, NOW, savings and money market accounts; and

 

·

opportunistically seek to purchase or sell loans in the future including whole or participations in one to four-family residential real estate loans, commercial and multi-family real estate loans and student loans;

  

·expanding our banking franchise as opportunities arise through de novo branching or the addition of a loan production office, although we do not currently have any understandings or agreements to establish new branch offices or loan production offices.

 

Lending Activities

 

General. Historically, our principal lending activity has been the origination, for retention in our portfolio, of mortgage loans collateralized by one- to four-family residential real estate located within our primary market area, and at December 31, 2016, $24.8 million, or 51.3%, of our total loan portfolio was comprised of owner-occupied one- to four-family residential real estate loans. We also offer commercial real estate and multi-family real estate loans, which we retain in our portfolio, including non-owner occupied one - to four-family residential real estate loans. At December 31, 2016, $15.8 million, or 32.6% of our total loan portfolio was comprised of commercial and multi-family real estate loans. We intend to grow our commercial and multi-family real estate loan portfolio, subject to favorable market conditions, including the origination of SBA loans. To a lesser extent, we also offer commercial loans that are not real estate secured as well as student loans and home equity loans. At December 31, 2016, $7.8 million, or 16.1% of our loan portfolio was comprised of commercial, student and home equity loans. We have, on occasion, purchased loans, including commercial real estate, one- to four-family residential real estate loans and student loans, and at December 31, 2016 purchased loans accounted for $8.5 million of our total loan portfolio. We will opportunistically seek to purchase whole or participations in one- to four-family residential real estate loans, commercial and multi-family real estate loans and student loans in the future.

 

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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale.

 

   At December 31, 
   2016   2015 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
Real estate loans:                    
One- to four-family residential  $24,809    51.3%  $29,156    61.4%
Commercial and multi-family residential   15,791    32.6    13,816    29.1 
Home equity lines of credit   524    1.1    408    0.9 
Student loans   5,743    11.9    1,933    4.1 
Other loans   1,505    3.1    2,190    4.5 
   $48,372        $47,503      
Total loans receivable        100.0%        100.0%
Less:                    
Deferred loan (costs) fees   (140)        (52)     
Allowance for loan losses   467         463      
                     
Total loans receivable, net  $48,045        $47,092      

 

Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2016. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.

 

       Commercial                 
   One-to-four   and multi-                 
   family   family                 
   residential   residential   Home Equity             
   real estate   real estate   lines of   Student   Other     
   loans   loans   credit   Loans   loans   Total 
           (In thousands)             
Due During the Years                              
Ending December 31,                              
2017  $5   $3,266   $-   $-   $19   $3,290 
2018   8    149    -    -    5    162 
2019   85    -    -    -    596    681 
2020 to 2021   296    545    -    489    7    1,337 
2022 to 2026   774    7,462    324    2,027    275    10,862 
2027 to 2031   1,277    2,950    200    -    517    4,944 
2032 and beyond   22,364    1,419    -    3,227    86    27,096 
   $24,809   $15,791   $524   $5,743   $1,505   $48,372 

 

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Fixed and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2016, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2017.

 

   Due after December 31, 2017 
   Fixed   Adjustable   Total 
       (In thousands)     
Real estate loans:               
One- to four-family residential  $20,413   $4,391   $24,804 
Commercial and multi-family residential   6,965    5,560   $12,525 
Home equity lines of credit   0    524    524 
Student Loans   2,516    3,227    5,743 
Other loans   693    793    1,486 
Total loans  $30,587   $14,495   $45,082 

 

One- to Four-Family Residential Real Estate Lending. The focus of our lending program has historically been the origination and retention in our portfolio of one- to four-family residential real estate loans. At December 31, 2016, $24.8 million, or 51.3% of our total loan portfolio, consisted of owner-occupied, one- to four-family residential real estate loans.

 

We originate both fixed-rate and adjustable-rate one- to four-family residential real estate loans. At December 31, 2016, 82.3% of our one- to four-family residential real estate loans were fixed-rate loans, and 17.7% were adjustable-rate loans.

 

Because we have not historically sold any of the one- to four-family residential real estate loans that we have originated, we have not originated these loans in conformance with either Fannie Mae or Freddie Mac underwriting guidelines. We may consider selling certain newly originated, longer-term (15 years or greater), one- to four-family residential real estate loans, in an effort to generate fee income and manage interest rate risk. It is expected that these loans will be underwritten according to Freddie Mac guidelines, and we will refer to loans that conform to such guidelines as “conforming loans.” We could originate both fixed- and adjustable-rate mortgage loans conforming to Fannie Mae guidelines in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Freddie Mac, which as of December 31, 2016 was generally $424,100 for single-family homes in our market area. We may also originate loans above the lending limit for conforming loans, which we will refer to as “jumbo loans.”

 

The majority of our one- to four-family residential real estate loans are secured by properties located in our primary lending area, which we define as the New York Counties of Westchester, Putnam and Rockland.

 

We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower.

 

Our fixed-rate one- to four-family residential real estate loans typically have terms of 15 or 30 years.

 

Our adjustable-rate one- to four-family residential real estate loans generally have fixed rates for initial terms of three, five or seven years, and adjust annually thereafter at a margin, which in recent years has been 2.50% over the weekly average yield on U.S. treasury securities

 

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adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan. Our adjustable-rate loans carry terms to maturity of up to 30 years. Certain of our adjustable-rate loans which were originated prior to 2010 can be adjusted upward but cannot be adjusted below the initial interest rate of the loan.

 

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.

 

We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one-to four- family residential real estate loans (i.e., loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).

 

Commercial and Multi-Family Real Estate Lending. Consistent with our strategy to expand our loan products and to enhance the yield and reduce the term to maturity of our loan portfolio, we offer commercial and multi-family real estate loans. At December 31, 2016, we had $15.8 million in commercial and multi-family real estate loans, representing 32.6% of our total loan portfolio. Subject to future economic, market and regulatory conditions, we will continue to increase our originations and purchases of commercial and multi-family real estate loans.

 

Generally, our commercial real estate and multi-family loans have terms of up to 10 years and amortize for a period of up to 25 years. Interest rates may be fixed or adjustable, and if adjustable then they are generally based upon a 5 year Treasury or Federal Home Loan Bank index or the Prime rate of interest.

 

Almost all of our commercial and multi-family real estate loans are collateralized by office buildings, mixed-use properties and multi-family real estate located in our market area.

 

We consider a number of factors in originating commercial and multi-family real estate loans, including non-owner occupied, one- to four-family residential real estate loans.

 

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We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial and multi-family real estate loans are appraised by outside independent appraisers who are approved by the board of directors on an annual basis. Personal guarantees are generally obtained from the principals of commercial and multi-family real estate loans.

 

Commercial and multi-family real estate loans, including non-owner occupied, one- to four-family residential real estate loans, entail greater credit risks compared to owner-occupied one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties.

 

Our loans-to-one borrower limit is 15% of Sunnyside Federal’s unimpaired capital, which limit was $1.9 million at December 31, 2016. We generally target commercial and multi-family real estate loans with balances of up to the lesser of $1.5 million or our legal lending limit. At December 31, 2016, our average commercial real estate loan had a balance of $607,000. At that same date, our largest commercial real estate relationship totaled $1.7 million, and was performing in accordance with its repayment terms.

 

Home Equity Lines of Credit. We offer home equity lines of credit secured by a first or second mortgage on residential property. Home equity lines of credit are made with adjustable rates, and with combined loan-to-value ratios of up to 80% on an owner-occupied principal residence.

 

Home equity lines of credit are generally underwritten using the same criteria that we use to underwrite one- to four-family residential real estate loans. Home equity lines of credit may be underwritten with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing first mortgage loan. Generally, our home equity lines of credit are originated with adjustable-rates based on the floating prime rate of interest and require interest paid monthly during the first five years and principal and interest for an additional 10 years. Home equity lines of credit are available in amounts of up to $250,000.

 

Home equity lines of credit have greater risk than one- to four-family residential real estate loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans,

 

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we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Decreases in real estate values could adversely affect the value of property used as collateral for our loans.

 

At December 31, 2016, the average loan balance of our outstanding home equity lines of credit was $105,000, and the largest outstanding balance of any such loan was $200,000. This loan was performing in accordance with its repayment terms at December 31, 2016.

 

Student Loans and Other Loans. We underwrite and purchase private student loans setting maximum debt-to-income ratios, minimum income and minimum FICO scores. The underwritten loans are typically variable rate loans for students who are pursuing undergraduate or post-undergraduate studies. These loans are guaranteed by a third party insurance company in the event of default and totaled $3.2 million at December 31, 2016. Our purchased portfolio is generally for consolidation student loans with repayment terms that do not exceed 10 years. These loans are not guaranteed by a third party insurance company and totaled $2.5 million at December 31, 2016. At December 31, 2016, student loans totaled $5.7 million and represented 11.9% of our loan portfolio.

 

To a lesser extent, we offer commercial loans that are not real estate secured as well as passbook loans. At December 31, 2016, other loans totaled $1.5 million, or 3.1% of our loan portfolio.

 

Management believes that offering student loans and other loan products helps expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

 

Student loans and other loans generally have greater risk compared to longer-term loans secured by one- to four-family residential real estate loans.

 

Loan Originations, Purchases and Sales. Our loan originations are generated by our loan personnel operating at our banking office. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.

 

We have historically retained all of our loans in portfolio, but we may, subject to favorable market conditions, consider selling certain longer-term (15 years or greater), fixed-rate one-to-four family residential real estate loans.

 

We have, on occasion, purchased commercial real estate and one- to four-family residential real estate loans, and in recent years, student loans. At December 31, 2016, these types of purchased loans accounted for $8.5 million of our total loan portfolio.

 

 11

 

We will opportunistically seek to purchase loans in the future including whole or participations in one to four-family residential real estate loans, commercial and multi-family real estate loans and student loans.

 

The following table shows our loan origination, purchases and repayment activities for the years indicated.

 

  

Year Ended

December 31,

 
   2016   2015 
   (In thousands) 
         
Total loans at beginning of year  $47,503   $43,570 
Loans originated:          
Real estate loans:          
One- to four-family residential       555 
Commercial and multi-family   4,369    6,236 
Home equity lines of credit   150    50 
Total real estate loans   4,519    6,841 
           
Student loans   1,337    1,822 
Other   1,393    38 
           
Total loans originated  $7,249   $8,701 
           
Loans Purchased:          
One- to four-family residential       6,011 
Commercial and multi-family        
Student loans   3,226     
Total Loans Purchased   3,226    6,011 
           
Loans Sold:        
Commercial and multi-family   843    262 
Other   547     
Total Loans Sold   1,390    262 
Deduct:          
Principal repayments   8,216    10,517 
           
Net loan activity   869    3,933 
           
Total loans at end of year  $48,372   $47,503 

 

Loan Approval Procedures and Authority. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Sunnyside Federal’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2016, our largest credit relationship totaled $1.7 million and was secured by commercial real estate. At December 31, 2016, this relationship was performing in accordance with its repayment terms. Our second largest relationship at this date was a $1.7 million loan secured by commercial real estate that was performing in accordance with its repayment terms.

 

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations.

 

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The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.

 

All commercial and multi-family real estate loans require approval from our board of directors. Our credit committee which is comprised of our President and Chief Executive Officer, our Chief Financial Officer and one outside director, has approval authority of up to $500,000 for one- to four-family residential real estate loans and up to $250,000 for home equity lines of credit.

 

Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the improved property is determined to be in a flood zone area.

 

Collection Procedures. When a residential mortgage borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. With respect to residential real estate loans, we generally send a written notice of non-payment to the borrower 15, 30, 60 and 90 days after a loan is first past due. When a loan becomes 90 days past due, the loan is turned over to our attorneys to ensure that further collection activities are conducted in accordance with applicable laws and regulations. All loans past due 90 days are put on non-accrual and reported to the board of directors monthly. If our attorneys do not receive a response from the borrower, or if the terms of any payment plan established are not followed, then foreclosure proceedings will be implemented. Management submits an Asset Classification Report detailing delinquencies to the board of directors on a monthly basis.

 

Delinquent Loans. The following table sets forth certain information regarding delinquencies in our loan portfolio.

 

   Loans Delinquent For     
   30-89 Days   90 Days and Over   Total 
   Number   Amount   Number   Amount   Number   Amount 
   (Dollars in thousands) 
                         
At December 31, 2016                              
Real estate loans:                              
One- to four-family residential   1   $272    2   $337    3   $609 
Commercial and multi-family residential   -    -    -    -    -    - 
Home equity lines of credit             1    21    1    21 
Commercial   -    -    -    -    -    - 
Student   2    15    -    -    2    15 
Other loans   -    -    -    -    -    - 
Total   3   $287    3   $358    6   $645 
                               
At December 31, 2015                              
Real estate loans:                              
One- to four-family residential   1   $279    1   $289    2   $568 
Commercial and multi-family residential   1    737    -    -    1    737 
Home equity lines of credit   1    25    -    -    1    25 
Commercial   -    -    -    -    -    - 
Student   -    -    -    -    -    - 
Other loans   -    -    -    -    -    - 
Total   3   $1,041    1   $289    4   $1,330 

 

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Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

 

   At December 31, 
   2016   2015 
   (Dollars in thousands) 
         
Non-accrual loans:          
Real estate loans:          
One- to four-family residential  $609   $289 
Commercial and multi-family        
Home equity lines of credit   21     
Student loans        
Other        
Total  $630   $289 
           
Accruing loans 90 days or more past due:          
Real estate loans:          
One- to four-family residential  $   $ 
Commercial and multi-family        
Home equity lines of credit        
Student loans        
Other        
Total loans 90 days or more past due        
           
Total non-performing loans  $630   $289 
           
Real estate owned       2 
Other non-performing assets        
           
Total non-performing assets  $630   $291 
           
Troubled debt restructurings:          
Real estate loans:          
One- to four-family residential  $   $ 
Commercial and multi-family        
Home equity lines of credit        
Other        
Total  $   $ 
           
Ratios:          
Total non-performing loans to total loans   1.30%   0.61%
Total non-performing loans to total assets   0.70%   0.32%
Total non-performing assets to total assets   0.70%   0.32%

 

For the year ended December 31, 2016, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $39,500. Interest income recognized on such loans for the year ended December 31, 2016 was $36,800.

 

Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified as a loss is considered uncollectible and of such little value that continuance as an

 

 14

 

asset of the institution is not warranted. Another category designated “special mention” also may be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. If a classified asset is deemed to be impaired with measurement of loss, Sunnyside Federal will establish a charge-off of the loan pursuant to Accounting Standards Codification Topic 310, “Receivables.”

 

The following table sets forth information regarding classified assets and special mention assets at December 31, 2016 and 2015.

 

   At December 31, 
   2016   2015 
   (In thousands) 
     
Classification of Assets:          
Substandard  $581   $289 
Doubtful        
Loss        
           
Total Classified Assets  $581   $289 
           
Special Mention  $   $1,576 

 

Potential problem loans are loans that are currently performing and are not included in non-accrual loans above, but may be delinquent. These loans require an increased level of management attention, because we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and as a result such loans may be included at a later date in non-accrual loans. At December 31, 2016, we had no potential problem loans that are not accounted for above under “ – Classified Assets.” Please see “ – Non-Performing Assets” above for a discussion of our special mention loans at December 31, 2016.

 

Allowance for Loan Losses. We maintain the allowance through provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. Recoveries on loans charged-off are restored to the allowance for loan losses. The allowance for loan losses is maintained at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. The level of allowance for loan losses is based on management’s periodic review of the collectability of the loans principally in light of our historical experience, augmented by the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. We evaluate our allowance for loan losses quarterly. We will continue to monitor all items involved in the allowance calculation closely.

 

In addition, the regulatory agencies, as an integral part of their examination and review process, periodically review our loan portfolios and the related allowance for loan losses. Regulatory agencies may require us to increase the allowance for loan losses based on their judgments of information available to them at the time of their examination, thereby adversely affecting our results of operations.

 

For 2016 and 2015, we recorded a provision of $4,000 and $67,000, respectively. The allowance for loan losses was $467,000, or 0.97% of total loans, at December 31, 2016,

 

 15

 

compared to $463,000, or 0.98% of total loans, at December 31, 2015. At both dates, the level of our allowance reflects management’s view of the risks inherent in the loan portfolio and high level of asset quality. Consistent with our business strategy, we intend to increase our originations of commercial and multi-family real estate and commercial loans. These types of loans generally bear higher risk than our one- to four-family residential real estate loans. Accordingly we would expect to increase our allowance for loans losses in the future as the balance of these types of loans increase in our portfolio.

 

The following table sets forth the analysis of the activity in the allowance for loan losses for the fiscal years indicated:

 

   At or For the Years
Ended December 31,
 
   2016   2015 
   (In thousands) 
         
Balance at beginning of year  $463   $396 
           
Charge-offs:          
Real estate loans:          
One- to four-family residential        
Commercial and multi-family        
Home equity lines of credit        
Other loans        
Total charge-offs        
           
Recoveries:          
Real estate loans:          
One- to four-family residential        
Commercial and multi-family        
Home equity lines of credit        
Other loans        
Total recoveries        
           
Net charge-offs        
Provision for loan losses   4    67 
           
Balance at end of year  $467   $463 
           
Ratios:          
Net charge-offs to average loans outstanding   %   %
Allowance for loan losses to non-performing loans at end of year   74.1%   160.2%
Allowance for loan losses to total loans at end of year   0.97%   0.98%

 

Allocation of Allowance for Loan Losses. The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated. The table also reflects each loan category as a percentage of total loans receivable. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. We did not have an unallocated allowance as of the dates presented.

 

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At December 31,

 
  

2016

  

2015

 
  

Amount

  

Percent of
Allowance to
Total
Allowance

  

Percent of
Loans in
Category to
Total Loans

  

Amount

  

Percent of
Allowance to
Total
Allowance

  

Percent of
Loans in
Category to
Total Loans

 
   (Dollars in thousands) 
                         
Real estate loans:                              
One- to four-family residential  $297    63.6%   51.3%  $315    68.1%   61.4%
Commercial and multi-family residential   138    29.6    32.6    130    28.1    29.1 
Home equity lines of credit   5    1.0    1.1    3    0.6    0.9 
Student loans   20    4.3    11.9    14    3.0    4.1 
Other loans   7    1.5    3.1    1    0.0    4.5 
Total allowance for loan losses  $467    100%   100%  $463    100%   100%

 

Securities Activities

 

General. Our investment policy is established by the board of directors. The objectives of the policy are to: (i) ensure adequate liquidity for loan demand and deposit fluctuations, and to allow us to alter our liquidity position to meet both day-to-day and long-term changes in assets and liabilities; (ii) manage interest rate risk in accordance with our interest rate risk policy; (iii) provide collateral for pledging requirements; (iv) maximize return on our investments; and (v) maintain a balance of high quality diversified investments to minimize risk.

 

Our investment committee, consisting of our President and Chief Executive Officer, our Chief Financial Officer, our Chief Operating Officer and one outside director is responsible for implementing our investment policy, including approval of investment strategies and monitoring investment performance. Our President and Chief Executive Officer and our Chief Financial Officer are each authorized to execute purchases or sales of securities of up to $2.0 million. The board of directors regularly reviews our investment strategies and the market value of our investment portfolio.

 

We account for investment and mortgage-backed securities in accordance with Accounting Standards Codification Topic 320, “Investments - Debt and Equity Securities.” Accounting Standards Codification 320 requires that investments be categorized as held-to maturity, trading, or available for sale. Our decision to classify certain of our securities as available-for-sale is based on our need to meet daily liquidity needs and to take advantage of profits that may occur from time to time.

 

Federally chartered savings institutions have authority to invest in various types of assets, including government-sponsored enterprise obligations, securities of various federal agencies, residential mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, corporate debt instruments, debt instruments of municipalities and Fannie Mae and Freddie Mac equity securities. At December 31, 2016, our investment portfolio consisted of securities and mortgage-backed securities issued by U.S. Government agencies or U.S. Government-sponsored enterprises and state and political subdivisions. As a member of Federal Home Loan Bank of New York, we are required to purchase stock in the Federal Home Loan Bank of New York and at December 31, 2016, we owned $235,000 in stock. At December 31, 2016, we had no investments in a single company or entity (other than an agency of the U.S. Government or a U.S. Government-sponsored enterprise) that had an aggregate book value in excess of 10% of our equity.

 

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The following table sets forth the amortized cost and fair value of our securities portfolio (excluding common stock we hold in the Federal Home Loan Bank of New York and in the Atlantic Central Bankers Bank) at the dates indicated.

 

   At December 31, 
   2016   2015 
  

Amortized
Cost

   Fair
Value
  

Amortized
Cost

   Fair
Value
 
   (Dollars in thousands) 
Securities held to maturity:                    

United States government and agency securities

  $2,000   $2,012   $2,000   $2,049 
Mortgage-backed securities   1,405    1,457    1,920    1,979 
State, county and municipal securities   550    542    816    831 
Total securities held to maturity  $3,955   $4,011   $4,736   $4,859 
                     
Securities available for sale:                    
Unites States government and agency securities  $3,199   $3,192   $5,661   $5,615 
Mortgage-backed securities   26,905    26,139    25,327    25,135 
Total securities available for sale  $30,104   $29,331   $30,988   $30,750 

 

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2016 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

 

   One Year or Less   More than One Year through
Five Years
   More than Five Years through
Ten Years
   More than Ten Years   Total Securities 
   Amortized Cost   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average Yield
   Amortized
Cost
   Weighted
Average Yield
   Amortized
Cost
   Weighted
Average Yield
   Amortized
Cost
   Fair Value   Weighted
Average
Yield
 
   (Dollars in thousands) 
                                             
Securities held to maturity:                                                       
US government and agency securities  $-    -%  $-    -  $-    -%  $2,000    3.98%  $2,000   $2,012    3.98%
Mortgage-backed securities  $-    -%  $-    -  $-    -%  $1,405    2.09%  $1,405   $1,457    2.09%
State, county and municipal securities  $-    -%  $204    1.26%  $-    -%  $346    3.27%  $550   $542    2.53%
Total securities held to maturity  $-    -%  $204    1.26%  $-    -%  $3,751    3.21%  $3,955   $4,011    3.11%
                                                        
Securities available for sale                                                       
US government and agency securities  $2,200    0.41%  $999    1.52%  $-    -  $-    -%  $3,199   $3,192    0.76%
Mortgage-backed  $-    -  $-    -%  $2,906    1.36%  $23,999    1.77%  $26,905   $26,139    1.73%
Total securities available for sale  $-2,200    0.41%  $-999    1.52%  $2,906    1.36%  $23,999    1.77%  $30,104   $29,331    1.63%

 

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Sources of Funds

 

General. Deposits, scheduled amortization and prepayments of loan principal, maturities and calls of securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. We can also borrow from the Federal Home Loan Bank to fund our operations and we had $3.0 million and $0 in advances at December 31, 2016 and 2015, respectively.

 

Deposits. We offer deposit products having a range of interest rates and terms. We currently offer statement savings accounts, NOW accounts, noninterest-bearing demand accounts, money market accounts and certificates of deposit. Our strategic plan includes a greater emphasis on developing commercial business activities, both deposit and lending customer relationships.

 

Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from areas surrounding our branch office. In order to attract and retain deposits we rely on paying competitive interest rates and providing quality service.

 

Based on our experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At December 31, 2016, $25.6 million, or 34.5% of our total deposit accounts were certificates of deposit, of which $16.0 million had maturities of one year or less.

 

The following tables set forth the distribution of our average deposit accounts, by account type, for the years indicated.

 

   2016   2015 
   Average
Balance
   Percent   Weighted
Average
Rate
   Average
Balance
   Percent   Weighted
Average
Rate
 
   (In thousands) 
                         
Deposit Type                              
Non-interest-bearing checking  $4,343    5.6%   -%  $4,033    5.1%   %
NOW   12,095    15.6    0.05    10,255    13.0    0.06 
Savings   29,882    38.6    0.11    30,260    38.5    0.11 
Money Market   2,989    3.9    0.10    3,040    3.9    0.10 
Certificates of Deposit   28,068    36.3    0.95    31,030    39.5    0.99 
Total Deposits  $77,377    100.0%   0.40%  $78,618    100.0%   0.44%

 

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The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

 

   At December 31, 
   2016   2015 
   (In thousands) 
         
Interest Rate:          
Less than 2.00%  $22,203   $21,139 
2.00% to 2.99%   3,394    8,990 
3.00% to 3.99%   -    - 
4.00% to 4.99%   -    - 
5.00% and above   -    - 
           
Total  $25,597   $30,129 

 

Maturities of Certificates of Deposit Accounts. The following table sets forth the amount and maturities of certificates of deposit accounts at the dates indicated.

 

   At December 31, 2016 
   Period to Maturity 
  

Less Than or
Equal to

One Year

  

More Than
One to

Two Years

   More Than
Two to
Three Years
   More Than
Three Years
   Total   Percent of
Total
 
   (Dollars in thousands) 
                               
Interest Rate Range:                              
Less than 2.00%  $12,819   $7,119   $1,114   $1,151   $22,203    86.7%
2.00% to 2.99%   3.169    -    100    125    3,394    13.3 
3.00% to 3.99%   -    -    -    -    -    - 
4.00% to 4.99%   -    -    -    -    -    - 
                               
Total  $15,988   $7,119   $1,214   $1,276   $25,597    100.0%

 

As of December 31, 2016, the aggregate amount of outstanding certificates of deposit at Sunnyside Federal in amounts greater than or equal to $100,000 was approximately $9.0 million. The following table presents the maturity of these certificates of deposit at such date.

 

Period to Maturity  At December 31, 2016 
   (In thousands) 
     
Three months or less  $3,403 
Over three through six months   601 
Over six months through one year   2,654 
Over one year to three years   2,051 
Over three years   313 
      
Total  $9,022 

 

Borrowings: As a member of the Federal Home Loan Bank of New York, Sunnyside Federal is eligible to obtain advances from the Federal Home Loan Bank by pledging investment securities as collateral or mortgage loans, provided certain standards related to credit-worthiness have been met. Federal Home Loan Bank advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities. The following table presents our outstanding balances and interest rates on these advances:

 

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   At or For the Years Ended December 31, 
   2016   2015 
   (In thousands) 
         
Balance at end of period  $3,000   $- 
Average balance during period   3,585   $79 
Maximum outstanding at any month end   5,300   $1,000 
Interest rate at end of period   0.81%  $- 
Average interest rate during period   0.61%  $0.34%

 

Expense and Tax Allocation

 

Sunnyside Federal has entered into an agreement with Sunnyside Bancorp to provide it with certain administrative support services for compensation not less than the fair market value of the services provided.  In addition, Sunnyside Federal and Sunnyside Bancorp have entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.

 

Employees

 

As of December 31, 2016, we had 15 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

 

REGULATION AND SUPERVISION

 

General

 

As a federal savings association, Sunnyside Federal is subject to examination and regulation by the Office of the Comptroller of the Currency (“OCC”), and is also subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). The federal system of regulation and supervision establishes a comprehensive framework of activities in which Sunnyside Federal may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund.

 

Sunnyside Federal also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board”, which governs the reserves to be maintained against deposits and other matters. In addition, Sunnyside Federal is a member of and owns stock in the Federal Home Loan Bank of New York, which is one of the twelve regional banks in the Federal Home Loan Bank System. Sunnyside Federal’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a lesser extent, state law, including in matters concerning the ownership of deposit accounts and the form and content of Sunnyside Federal’s loan documents.

 

As a savings and loan holding company, Sunnyside Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Sunnyside Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

 

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Set forth below are certain material regulatory requirements that are applicable to Sunnyside Federal and Sunnyside Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Sunnyside Federal and Sunnyside Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Sunnyside Bancorp, Sunnyside Federal and their operations.

 

Dodd-Frank Act

 

The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies, as well as changes that affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Sunnyside Federal, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

 

The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage originations.

 

Federal Banking Regulation

 

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Sunnyside Federal may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable

 

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limits. Sunnyside Federal may also establish subsidiaries that may engage in certain activities not otherwise permissible for Sunnyside Federal, including real estate investment and securities and insurance brokerage.

 

Capital Requirements. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.” The financial holding company of a national bank will be put under directives to raise its capital levels or divest its activities if the depository institution falls from that level.

 

In July 2013, the Federal Reserve published final rules establishing a new comprehensive capital framework for U.S. banking organizations, referred to herein as the Basel Rules. The OCC had adopted substantially identical rules The Basel Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions, including Sunnyside Federal, compared to the previous U.S. risk-based capital rules. The Basel Rules defined the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel Rules also addressed risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replaced the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 Basel II capital accords. The Basel Rules also implemented the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel Rules became effective for us on January 1, 2015 (subject to phase-in periods for certain components).

 

The Basel Rules (i) introduced a new capital measure called “Common Equity Tier 1,” or CET1, (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) applied most deductions/adjustments to regulatory capital measures to CET1 and not to the other components of capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios, and (iv) expanded the scope of the reductions/adjustments from capital as compared to existing regulations.

 

Under the Basel Rules, the minimum capital ratios for Sunnyside Federal are as follows:

 

5.125 percent CET1 to risk-weighted assets.

 

6.625 percent Tier 1 capital (i.e., CET1 plus Additional Tier 1) to risk-weighted assets.

 

8.625 percent Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets.

 

4.0 percent Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

 

When fully phased in on January 1, 2019, the Basel Rules will also require the Company to maintain a 2.5 percent “capital conservation buffer,” composed entirely of CET1, on top of the minimum risk-weighted asset ratios, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0 percent, (ii) Tier 1 capital to risk-weighted assets of at least 8.5 percent, and (iii) total capital to risk-weighted assets of at

 

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least 10.5 percent. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625 percent level and will increase by 0.625 percent on each subsequent January 1st, until it reaches 2.5 percent on January 1, 2019.

 

The Basel Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1. The deductions and other adjustments to CET1 are being phased in incrementally between January 1, 2015 and January 1, 2018.

 

Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including Sunnyside Federal, were permitted to make a one-time permanent election to continue to exclude these items effective as of January 1, 2015. We made this one-time election in the applicable bank regulatory reports as of March 31, 2015.

 

With respect to Sunnyside Federal, the Basel Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each capital quality level (other than critically undercapitalized); (ii) increasing the minimum Tier 1 capital ratio requirement for each category; and (iii) requiring a leverage ratio of 5 percent to be well-capitalized. The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a CET1 ratio of at least 6.5 percent, (iv) has a Tier 1 leverage ratio of at least 5.0 percent, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a CET1 ratio of at least 4.5 percent, (iv) has a Tier 1 leverage ratio of at least 4.0 percent, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a CET1 ratio of less than 4.5 percent or (iv) has a Tier 1 leverage ratio of less than 4.0 percent. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a CET1 ratio of less than 3.0 percent or (iv) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. When the capital conservation buffer is fully phased in, the capital ratios applicable to depository institutions under the Basel Rules will exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.

 

Generally, the Office of the Comptroller of the Currency is required to appoint a receiver or conservator for a federal savings institution that is “critically undercapitalized” within specific time frames. The regulations

 

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also provide that a capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the Office of the Comptroller of the Currency or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the Office of the Comptroller of the Currency notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as a restrictions on capital distributions and asset growth. The Office of the Comptroller of the Currency may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

 

The Basel Rules prescribe a standardized approach for calculating risk-weighted assets that expand the risk-weighting categories from the current four Basel I-derived categories (0 percent, 20 percent, 50 percent and 100 percent) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0 percent for U.S. Government and agency securities, to 600 percent for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In addition, the Basel Rules also provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

 

Sunnyside Federal’s capital ratios were all above the minimum levels required for it to be considered a “well capitalized” financial institution at December 31, 2016 under the “prompt corrective action” regulations in effect as of such date. We believe that, as of December 31, 2016, we would meet all capital adequacy requirements under the Basel Rules on a fully phased-in basis if such requirements were currently effective including after giving effect to the deductions described above.

 

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2016, Sunnyside Federal was in compliance with the loans-to-one borrower limitations.

 

Qualified Thrift Lender Test. As a federal savings association, Sunnyside Federal must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Sunnyside Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

 

Sunnyside Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended.

 

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A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2016, Sunnyside Federal satisfied the QTL test.

 

Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application for approval of a capital distribution if:

 

·the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

 

·the savings association would not be at least adequately capitalized following the distribution;

 

·the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

·the savings association is not eligible for expedited treatment of its filings.

 

Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Sunnyside Federal, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

 

A notice or application related to a capital distribution may be disapproved if:

 

·the federal savings association would be undercapitalized following the distribution;

 

·the proposed capital distribution raises safety and soundness concerns; or

 

·the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

 

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

 

Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the Office of the Comptroller of the Currency is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit

 

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Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.

 

The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Sunnyside Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

 

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as Sunnyside Federal. Sunnyside Bancorp is an affiliate of Sunnyside Federal because of its control of Sunnyside Federal. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings associations to maintain detailed records of all transactions with affiliates.

 

Sunnyside Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

 

·be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

·not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Sunnyside Federal’s capital.

 

In addition, extensions of credit in excess of certain limits must be approved by Sunnyside Federal’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

 

Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the

 

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Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.

 

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

 

Insurance of Deposit Accounts. The Deposit Insurance Fund (“DIF”) of the FDIC insures deposits at FDIC-insured depository institutions, such as Sunnyside Federal. Deposit accounts in Sunnyside Federal are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.

 

The FDIC charges insured depository institutions premiums to maintain the DIF. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels, and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates. Assessment rates range from 1.5 to 40 basis points of an institution’s total assets less tangible capital.

 

The Dodd-Frank Act increased the minimum target ratio for the DIF from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, and the FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.

 

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs, and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2016, the annualized FICO assessment was equal to 0.56 basis points of an institution's total assets less tangible capital.

 

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. Sunnyside Federal does not know of any practice, condition, or violation that could lead to termination of its deposit insurance.

 

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Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

 

Federal Home Loan Bank System. Sunnyside Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of New York, Sunnyside Federal is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2016, Sunnyside Federal was in compliance with this requirement.

 

Qualified Mortgages and Retention of Credit Risk. The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

 

·excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

 

·interest-only payments;

 

·negative-amortization; and

 

·terms longer than 30 years.

 

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.

 

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit risk for any asset that is not a “qualified residential mortgage.” The regulatory agencies have issued a proposed rule to implement this requirement. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations (as described above). Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.

 

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Other Regulations

 

Interest and other charges collected or contracted for by Sunnyside Federal are subject to state usury laws and federal laws concerning interest rates. Sunnyside Federal’s operations are also subject to federal laws applicable to credit transactions, such as the:

 

·Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

·Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

·Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

·Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

·Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

 

·Truth in Savings Act; and

 

·rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

 

The operations of Sunnyside Federal also are subject to the:

 

·Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

·Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

·Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

·The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Association Secrecy Act and the Office of Foreign Assets Control regulations; and

 

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·The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

 

Holding Company Regulation

 

General. Sunnyside Bancorp is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, Sunnyside Bancorp is registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over Sunnyside Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

 

Permissible Activities. The business activities of Sunnyside Bancorp are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations.

 

Federal law prohibits a savings and loan holding company, including Sunnyside Bancorp, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

 

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

 

·the approval of interstate supervisory acquisitions by savings and loan holding companies; and

 

·the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

 

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

 

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Capital. Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements. However, the Dodd-Frank Act required the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured depository subsidiaries. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions will apply to savings and loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.

 

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all Association and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

 

Dividends. Sunnyside Federal is required to notify the Federal Reserve Board thirty days before declaring any dividend to Sunnyside Bancorp. The financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the regulator and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

 

Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

 

Federal Securities Laws

 

Sunnyside Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Sunnyside Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

Emerging Growth Company Status

 

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” Sunnyside Bancorp qualifies as an emerging growth company under the JOBS Act.

 

An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in

 

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connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Sunnyside Bancorp will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. Sunnyside Bancorp has elected to comply with new or amended accounting pronouncements in the same manner as a private company.

 

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

 

TAXATION

 

Federal Taxation

 

General. Sunnyside Bancorp and Sunnyside Federal are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Sunnyside Bancorp and Sunnyside Federal.

 

Method of Accounting. For federal income tax purposes, Sunnyside Federal currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by large savings institutions, effective for taxable years beginning after 1995.

 

Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2016, we had no minimum tax credit carryforward.

 

Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. However, as a result of

 

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recent legislation, subject to certain limitations, the carryback period for net operating losses incurred in 2008 or 2009 (but not both years) was expanded to five years. At December 31, 2016, Sunnyside Federal had $1,584,000 of federal net operating loss carry-forwards and $2,130,000 of New York State net operating loss carry-forwards available for future use.

 

Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five year carryover period is not deductible. Sunnyside Federal had a capital loss carryover of $1,813,000, which expired unused during the year ending December 31, 2015. This capital loss carryover had been fully reserved for prior to 2015.

 

Corporate Dividends. We may generally exclude from our income 100% of dividends received from Sunnyside Federal as a member of the same affiliated group of corporations.

 

Audit of Tax Returns. Sunnyside Federal’s federal income tax returns have been audited for the years ended December 31, 2011 and 2012. Audit results concluded that no changes were proposed to the filed returns for each of the two years noted.

 

New York State Taxation

 

Sunnyside Bancorp and Sunnyside Federal report their combined income on a calendar year basis to New York State. New York State franchise tax on corporations is imposed in an amount equal to the greater of: (i) 6.5% of “entire net income” allocable to New York State; (ii) .125% of the capital base; or (iii) nominal minimum tax. Entire net income is based on federal taxable income, subject to certain modifications.

 

In addition, the companies are subject to a Metropolitan Transportation Business Tax surcharge equal to 28% of New York franchise tax, as calculated with certain adjustments.

 

In March 2014, tax legislation was enacted that changed the manner in which financial institutions and their affiliates are taxed in New York State. The most significant changes affecting the Company are summarized below:

 

·The statutory tax rate was reduced.

 

·An alternative tax on apportioned capital is imposed to the extent that it exceeds the tax on apportioned income. The New York State alternative tax is capped at $5 million for a tax year and is gradually phased out over six years.

 

·Thrift institutions that maintain a qualified residential loan portfolio are entitled to a specially computed modification that reduces the income taxable to New York State.

 

While most of the provisions of the law are effective for fiscal years beginning in 2015, the New York State statutory tax rate was not reduced until 2016. In addition, the Company’s minimum tax increased from

 

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approximately $10,000 to $18,000 per year. Also, as a result of the New York tax law changes, the Company recorded a valuation allowance on its New York deferred tax asset in the amount of $172,000 during 2016. The amount of the impact on our future tax expense will be affected by any changes in our operations, structure, or profitability.

 

Sunnyside Federal’s state income tax returns have not been audited in the most recent five-year period.

 

Availability of Annual Report on Form 10-K

 

This Annual Report on Form 10-K is available by written request to: Sunnyside Bancorp Inc, 56 Main Street, Irvington, New York 10533, Attention: Corporate Secretary.

 

ITEM 1A.          Risk Factors

 

The presentation of Risk Factors is not required for smaller reporting companies such as Sunnyside Bancorp.

 

ITEM 1B.          Unresolved Staff Comments

 

None.

 

ITEM 2.             Properties

 

We operate from our office located at 56 Main Street, Irvington, New York 10533. The aggregate net book value of our premises was $1.3 million at December 31, 2016.

 

ITEM 3.             Legal Proceedings

 

At December 31, 2016, we were not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes will not materially adversely affect our financial condition, our results of operations and our cash flows.

 

ITEM 4.             Mine Safety Disclosures.

 

Not applicable.

PART II

 

ITEM 5.               Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a)          Market Information, Holders and Dividend Information. Our common stock is quoted on the OTC Pink Marketplace under the symbol “SNNY.” The approximate number of holders of record of Sunnyside Bancorp common stock as of December 31, 2016 was 89. Certain shares of Sunnyside Bancorp are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

 

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The following table presents quarterly market information for Sunnyside Bancorp, Inc.’s common stock for the years ended December 31, 2016 and 2015:

 

2016  High Sale   Low Sale 
Quarter ended December 31  $13.40   $12.27 
Quarter ended September 30  $12.78   $12.40 
Quarter ended June 30  $12.90   $11.50 
Quarter ended March 31  $12.25   $11.50 

 

2015  High Sale   Low Sale 
Quarter ended December 31  $12.00   $10.26 
Quarter ended September 30  $10.83   $9.70 
Quarter ended June 30  $10.70   $10.00 
Quarter ended March 31  $10.25   $9.84 

 

Sunnyside Bancorp does not currently pay cash dividends on its common stock. Dividend payments by Sunnyside Bancorp are dependent on dividends it receives from Sunnyside Federal, because Sunnyside Bancorp has no source of income other than dividends from Sunnyside Federal, earnings from the investment of proceeds from the sale of shares of common stock retained by Sunnyside Bancorp and interest payments with respect to Sunnyside Bancorp’s loan to the Employee Stock Ownership Plan. See “Item 1. Business –Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”

 

(b)Sales of Unregistered Securities. Not applicable.

 

(c)Use of Proceeds. Not applicable.

 

(d)Securities Authorized For Issuance Under Equity Compensation Plans.

 

The following table provides information about options outstanding pursuant to the Sunnyside Bancorp, Inc. 2014 Equity Incentive Plan, which was approved by stockholders on September 16, 2014.

 

   Number of Securities to be
Issued Upon Exercise of

Outstanding Options
   Weighted Average Exercise
Price of
Outstanding Options
   Number of Securities
Remaining Available for
Future Issuance
 
Equity Compensation Plans Approved by Stockholders       n/a    92,655(1) 
Equity Compensation Plans Not Approved by Stockholders       n/a     
                
Total       n/a    92,655 

 

 

(1)The Company has not issued any stock options pursuant to the 2014 Equity Plan. The Company granted 10,500 restricted shares under the 2014 Equity Plan on June 16, 2015.

 

(e)Stock Repurchases. Not applicable.

 

(f)Stock Performance Graph. Not required for smaller reporting companies.

 

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ITEM 6.          Selected Financial Data

 

Not required for smaller reporting companies.

 

ITEM 7.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section is intended to help a reader understand the financial performance of Sunnyside Bancorp and its subsidiaries through a discussion of the factors affecting our financial condition at December 31, 2016 and December 31, 2015 and our results of operations for the years ended December 31, 2016 and 2015. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.

 

Overview

 

Sunnyside Federal is a federal savings association that was founded in 1930. Sunnyside Federal conducts business from its full-service banking office located in Irvington, New York which is located in Westchester County, New York approximately 25 miles north of New York City. We consider our deposit market area to be the Westchester County, New York towns of Irvington, Tarrytown, Sleepy Hollow, Hastings, Dobbs Ferry and Ardsley-on-Hudson, and consider our lending area to be Westchester, Putnam and Rockland Counties, New York.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans and commercial and multi-family real estate loans, and, to a much more limited extent, student loans, commercial, home equity lines of credit and other loans (consisting primarily of loans secured by deposits and marketable securities). At December 31, 2016, $24.8 million or 51.3% of our total loan portfolio was comprised of owner-occupied, one-to four family residential real estate loans; $15.8 million or 32.6% was comprised of commercial and multi-family real estate loans and $5.7 million or 11.9% was comprised of student loans.

 

As a result of our strict, quality-oriented underwriting and credit monitoring processes, we had $630,000 in non-performing assets at December 31, 2016 and $291,000 at December 31, 2015. There were $645,000 of delinquent loans at December 31, 2016 compared to $1.3 million of delinquent loans at December 31, 2015.

 

We also invest in securities, which consist primarily of U.S. government agency obligations and mortgage-backed securities and to a lesser extent, securities of states, counties and political subdivisions.

 

We offer a variety of deposit accounts, including certificate of deposit accounts, money market accounts, savings accounts, NOW accounts and individual retirement accounts. We can also borrow from the Federal Home Loan Bank to fund our operations and we had $3 million and $0 in advances at December 31, 2016 and 2015, respectively.

 

A majority of the members of our current executive management team joined Sunnyside Federal since 2010. Since that time, we have begun to shift Sunnyside Federal’s strategy to diversify our traditional thrift focus into a more commercial bank style of operation with a broadened base of financial products and services while emphasizing superior customer service. While residential real estate lending has been, and will remain, the most important part of our operations, we intend to diversify our focus on non-residential lending, including

 

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commercial and multi-family real estate lending, student loan financing and commercial lending, including Small Business Administration (SBA) lending.

 

Critical Accounting Policies

 

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

 

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

 

The following represent our critical accounting policies:

 

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

 

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

 

The analysis has two components, specific and general allocations. Specific percentage allocations can be made for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the

 

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amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

 

Securities Valuation and Impairment. We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our fair values from a third party service. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral. At December 31, 2016, 98.4% of our securities were issued by U.S. government agencies or U.S. government-sponsored enterprises.

 

Comparison of Financial Condition at December 31, 2016 and December 31, 2015

 

Total assets decreased $1.3 million, or 1.5%, to $90.3 million at December 31, 2016 from $91.6 million at December 31, 2015. The decrease was primarily the result of a decrease in investment securities partly offset by an increase in loans.

 

Securities available for sale decreased $1.4 million, or 4.6%, to $29.3 million at December 31, 2016 from $30.8 million at December 31, 2015 while securities held to maturity decreased $782,000, or 16.5%. The decrease in securities during 2016 was primarily a result of funding loan growth.

 

Net loans receivable increased $953,000, or 2.0%, to $ 48.0 million at December 31, 2016 from $47.1 million at December 31, 2015. The increase in loans receivable during this period was primarily due to an increase of $3.8 million, or 197% increase in student loans and an increase of $2.0 million, or 14.3%, in commercial and multi-family real estate loans. These increases were partly offset by a $4.3 million decrease in the one-to four- family residential loan portfolio and a $678,000 decrease in commercial loans.

 

Cash and cash equivalents decreased $403,000, or 12.1%, to $2.9 million at December 31, 2016 from $3.3 million at December 31, 2015. The decrease resulted primarily from funding loans that was partly offset by a decrease in investments and deposits. Principal payments and sales reduced the securities available for sale and held to maturity portfolios by $1.4 million, or 4.6%, and $782,000, or 16.5%, respectively.

 

At December 31, 2016, our investment in bank-owned life insurance was $2.2 million, an increase of $58,000, from $2.1 million at December 31, 2015. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us

 

 40

 

noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses, and we have not made any additional contributions to our bank-owned life insurance since 2002.

 

Deferred income taxes increased $39,000, or 3.2%, to $ 1.3 million at December 31, 2016 from $1.2 million at December 31, 2015. The increase resulted primarily from increases in the tax effect of temporary differences related to depreciation, unrealized losses on securities, federal net operating loss carryover and allowance for loan losses partly offset by decreases related to the unfunded pension liability and prepaid benefit plans.

 

Other assets, consisting primarily of prepaid insurance premiums, prepaid expenses and an annuity contract for a former director, increased $109,000, or 32.9%, to $438,000 at December 31, 2016 from $330,000 at December 31, 2015 primarily due to an increase in prepaid assets and receivables.

 

Total deposits decreased $3.8 million, or 4.9%, to $74.3 million at December 31, 2016 from $78.1 million at December 31, 2015. The decrease was primarily due to lower certificates of deposit and savings balances partly offset by increases in NOW and non-interest bearing balances. Certificates of deposits decreased $4.5 million, or 15.0% primarily due to the Company allowing higher rate deposits to run-off. Savings deposits decreased $720,000 or 2.4%. NOW balances increased $958,000 or 8.4%, while non-interest bearing checking increased $626,000 or 17.3%.

 

We had $3.0 million in Federal Home Loan Bank advances outstanding at December 31, 2016 and $0 at December 31, 2015. At December 31, 2016, we had the ability to borrow approximately $27.1 million from the Federal Home Loan Bank of New York, subject to our pledging sufficient assets. Additionally, at December 31, 2016, we had the ability to borrow up to $2.0 million on a Fed Funds line of credit with Atlantic Community Bankers Bank.

 

Total equity decreased $622,000, or 5.2%, to $11.2 million at December 31, 2016 compared to $11.9 million at December 31, 2015 primarily due to an increase in unrealized losses in our investment portfolio included in accumulated other comprehensive loss along with our net loss for 2016.

 

Comparison of Operating Results for the Years Ended December 31, 2016 and 2015

 

General. We had a net loss of $117,000 during 2016 as compared to a net loss of $80,000 for 2015. The increase in our net loss resulted from an increase in income tax expense and other non-interest expense partly offset by higher net interest income and non-interest income as well as a decrease in the loan loss provision.

 

Our current business strategy includes increasing the Bank’s asset size, diversifying our loan portfolio to increase our non-residential lending, including commercial and multi-family real estate lending and commercial lending and increasing our non-interest income, as ways to improve our profitability in future periods.

 

Our ability to achieve profitability depends upon a number of factors, including general economic conditions, competition with other financial institutions, changes to the interest rate environment that may reduce our profit margins or impair our business strategy, adverse changes in the securities markets, changes in laws or government regulations, changes in consumer spending, borrowing, or saving, and changes in accounting policies. If we fail to generate additional revenue or reduce our expenses, we may continue to incur

 

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losses in 2017 and in future years and we may never generate net income. Over time, continued net losses and negative cash flow could drain our capital and endanger the safety and soundness of the Bank.

 

Net Interest Income. Net interest income increased $177,000, or 7.6%, to $2.5 million for the year ended December 31, 2016 from $2.3 million for the year ended December 31, 2015. The increase in net interest income was primarily due to a $160,000 or 6.0% increase in interest and dividend income.

 

Interest income on loans increased $101,000, or 5.0%, primarily due to increases in the rate and balances on loans . Interest income on mortgage-backed securities increased $53,000 or 11.2%, primarily due to an increase in balances. Interest income on federal funds sold and other interest earning assets increased $7,000, or 82.4% mainly due to higher yields. The average yield on our loans increased 13 basis points, and the average yield on our mortgage-backed securities increased two basis points while the average yield on investment securities increased 29 basis points during 2016. Our net interest rate spread increased 15 basis points to 2.89% for the year ended December 31, 2016 from 2.74% for the year ended December 31, 2015, and our net interest margin increased 14 basis points to 2.93% for 2016 from 2.79% for 2015.

 

Interest and Dividend Income. Interest and dividend income increased $160,000 to $2.8 million for the year ended December 31, 2016 from $2.7 million for the year ended December 31, 2015. Loan interest income increased $101,000 or 5.0%, interest on mortgage backed securities increased $ 53,000 or 11.2% and interest on federal funds sold and other earning assets increased $7,000 or 82.4% compared to 2015.

 

Interest income on loans increased $101,000, or 5.0%, to $2.1 million for the year ended December 31, 2016 from $2.0 million for the year ended December 31, 2015. The increase resulted primarily from an increase in average loan balances of $899,000 in 2016 to $48.1 million from $47.2 million in 2015 and a 13 basis point increase in the yield to 4.39% in 2016 from 4.26% for 2015.

 

Interest and dividend income on mortgage-backed securities increased $53,000 to $529,000 primarily due to an increase in the average balance of $2.8 million and a two basis point increase in yield from 1.75% in 2015 to 1.77% in 2016. Interest and dividend income of federal funds sold and other earning assets increased $7,000 to $16,000 mainly due to an 86 basis point increase in yield from 0.41% in 2015 to 1.27% in 2016. These increases were partly offset by a $1,000 decrease in income from investment securities primarily due to a $751,000 decrease in average balances for the year ended December 31, 2016 which was partly offset by a 29 basis point increase in yield from 2.62% in 2015 to 2.91% in 2016.

 

Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and borrowings, decreased $17,000 to $333,000 for the year ended December 31, 2016 from $350,000 for the year ended December 31, 2015. The cost of interest-bearing deposits and borrowings decreased four basis points to 0.43% for 2016 compared to 0.47% for 2015, reflecting lower market interest rates and a change in the mix of deposits and borrowings. Higher rate certificates of deposit were allowed to run-off and were replaced with lower costing advances from the Federal Home Loan Bank.

 

Provision for Loan Losses. We establish provisions for loan losses that are charged to operations in order to maintain the allowance for loan losses at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. We recorded a provision for loan losses of $4,000 for the year ended December 31, 2016 compared to $67,000 for the year ended December 31, 2015. The decrease was mainly due to lower provisions for the residential and commercial and multi-family portfolios in 2016 compared to 2015. The allowance for loan

 

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losses was $467,000 at December 31, 2016 compared to $463,000 at December 31, 2015. We had $630,000 in non-performing loans at December 31, 2016 and $289,000 at December 31, 2015. During the years ended December 31, 2016 and 2015 we had no loan charge-offs or recoveries.

 

Noninterest Income. Noninterest income increased $26,000, or 8.4,% to $335,000 for the year ended December 31, 2016 from $309,000 for the year ended December 31, 2015. The increase was primarily due to a $27,000 increase in gains on the sale of loans as well as an increase of $5,000 in gains on the sale of securities and a $2,000 increase in fees and service charges. These increases were partly offset by a $9,000 decrease in income on bank owned life insurance due to lower interest rates paid on these investments.

 

Noninterest Expense. Noninterest expense increased $126,000, or 4.6%, to $2.9 million for the year ended December 31, 2016 from $2.7 million for the year ended December 31, 2015. Compensation and benefits increased $32,000, or 2.3%, to $1.5 million for 2016 from $1.4 million for 2015, resulting from normal salary and related benefit increases. Data processing fees increased $20,000, or 7.8%, primarily due to higher costs related to the Bank’s core processing as well as additional costs to support new products and services and higher debit card expenses. Professional fees increased $68,000, or 19.2%, primarily due to higher legal and accounting fees. Advertising and promotion expense increased $8,000, or 19.0%, due to new business and product development. Other expense increased $28,000, or 12.4%, primarily due to costs related to the development of the bank’s SBA program. These increases were partly offset by a decrease of $15,000, or 24.1%, in FDIC insurance premiums and a decrease of $16,000, or 4.2%, in occupancy and equipment expense. The FDIC changed their assessment methodology which resulted in a decrease in costs due to the Bank’s lower risk profile. Occupancy costs were lower primarily to a decrease in repairs and depreciation expense.

 

Income Tax Expense. We recorded income tax expense of $78,000 for the year ended December 31, 2016 based on a loss before taxes of $39,000 and the recording of a valuation allowance on the New York State deferred tax asset of $171,000 compared to a tax benefit of $98,000 in 2015 based on a loss before taxes of $179,000. The increase in income tax expense was mainly due to the recording of the valuation allowance on the New York State deferred tax asset which arose as a result of a change in the New York State tax law. Based upon projections of future New York taxable income, management has determined that it is more likely than not that temporary differences and carryforwards will not be realized on future New York State tax returns. For 2015, the income tax benefit was calculated based on our pre-tax loss adjusted for permanent book to tax differences, such as non-taxable interest income on municipal securities and income on bank owned life insurance.

 

Analysis of Net Interest Income

 

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances and include non-accrual loans. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. No taxable equivalent adjustments have been made.

 

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   For the Years Ended December 31, 
   2016   2015 
   Average Balance  

Interest Income/
Expense

  

Yield/

Cost

   Average Balance  

Interest Income/
Expense

  

Yield/

Cost

 
     
Interest-earning assets:                              
Loans  $48,073   $2,109    4.39%  $47,174   $2,009    4.26%
Investment securities   6,322    184    2.91%   7,073    185    2.62%
Mortgage-backed securities   29,831    529    1.77%   27,069    475    1.75%
Fed funds sold and other interest-earning assets   1,257    16    1.27%   2,190    9    0.41%
Total interest-earning assets   85,483    2,838    3.32%   83,506    2,678    3.21%
Non-interest-earning assets   9,011              8,700           
Total assets  $94,494             $92,206           
                               
Interest-bearing liabilities:                              
Transaction accounts  $12,095    6    0.05%  $10,255    6    0.06%
Regular savings   29,882    34    0.11%   30,260    34    0.11%
Money market   2,989    3    0.10%   3,040    3    0.10%
Certificates of deposit   28,068    268    0.95%   31,030    307    0.99%
Advances from FHLB of N.Y.   3,585    22    0.61%   79    0    0.34%
Total interest-bearing liabilities   76,619    333    0.43%   74,664    350    0.47%
Noninterest-bearing liabilities   5,778              5,280           
Total liabilities   82,397              79,944           
Equity   12,097              12,262           
Total liabilities and equity  $94,494             $92,206           
                               
Net interest income       $2,505             $2,328      
Interest rate spread (1)             2.89%             2.74%
Net interest-earning assets (2)  $8,864             $8,842           
Net interest margin (3)        2.93%             2.79%     
Average interest-earning assets to average interest-bearing liabilities   111.57%             111.84%          

 

 

(1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the 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 average total interest-earning assets

 

 44

 

Rate/Volume Analysis

 

The following table presents the effects of changing rates and volumes on our net interest income for the fiscal years 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.

 

  

For the
Years Ended December 31,
2016 vs. 2015

 
   Increase (Decrease)
Due to
   Total
Increase
 
   Volume   Rate   (Decrease) 
Interest-earning assets:            
Loans  $39   $61   $100 
Investment securities   (21)   20    (1)
Mortgage-backed securities   48    6    54 
Fed funds sold and other interest-earning assets   (5)   12    7 
Total interest income   61    99    160 
                
Interest-bearing liabilities:               
NOW accounts   1    (1)   - 
Regular savings   -    -    - 
Money market   -    -    - 
Certificates of deposit   (28)   (11)   (39)
Other borrowings   22    -    22 
Total interest expense   (5)   (12)   (17)
Increase(decrease) in net interest income  $66   $111   $177 
                

 

Management of Market Risk

 

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset-Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

 

Historically, we have operated as a traditional thrift institution. A significant portion of our assets consist of longer-term, fixed-rate, one- to four-family residential real estate loans and securities, which we have funded primarily with deposits. Historically we have retained in our portfolio all of the one- to four-family residential real estate loans that we have originated. We have revised our business strategy with an increased emphasis on the origination of commercial

 

 45

 

and multi-family real estate loans and commercial loans. Such loans generally have shorter maturities than one- to four-family residential real estate loans. Additionally, subject to favorable market conditions, we will consider the sale or brokerage of certain newly originated longer-term (terms of 15 years or greater), one- to four-family residential real estate loans rather than retain all of such loans in portfolio as we have done in the past. Additionally, we have implemented a Small Business Administration (“SBA”) lending program and we will consider selling the government-guaranteed portions of such loans to generate additional fee income and manage interest rate risk. We are an SBA-approved lender.

 

Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model which is provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a one-year period based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. We also estimate the impact over a five year time horizon. The following table shows the estimated impact on net interest income for the one-year period beginning December 31, 2016 resulting from potential changes in interest rates. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

 

Rate Shift (1) 

Net Interest Income
Year 1 Forecast

  

Year 1 Change
from Level

 
   (In thousands)     
         
           
+400  $2,163    (11.27)%
+300  $2,323    (4.74)%
+200  $2,429    (0.39)%
+100  $2,456    0.72%
Level  $2,438     
-100  $2,344    (3.88)%

 

 

(1)The calculated changes assume an immediate shock of the static yield curve.

 

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. The tables also do not measure the changes in credit and liquidity risk that may occur as a result of changes in general interest rates. Accordingly, although the tables provide an

 

 46

 

indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our economic value of equity and will differ from actual results.

 

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

 

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, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. In addition, we have the ability to borrow from the Federal Home Loan Bank of New York. At December 31, 2016, we had the capacity to borrow approximately $27.1 million from the Federal Home Loan Bank of New York, subject to our pledging sufficient assets. Additionally, at December 31, 2016, we had the ability to borrow up to $2.0 million on a Fed Funds line of credit with Atlantic Community Bankers Bank. At December 31, 2016 and 2015, we had $3.0 million and $0 in outstanding advances from the Federal Home Loan Bank of New York.

 

Loan repayments and maturing securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of these sources of funds.

 

Our primary investing activities are the origination or purchase of one- to four-family real estate loans and commercial and multi-family real estate loans and the purchase of securities. For the year ended December 31, 2016, loan originations and purchases totaled $7.2 million and $3.2 million, respectively, compared to originations and purchases of $7.2 million and $7.5 million, respectively, for the year ended December 31, 2015. Purchases of investment and mortgage-backed securities totaled $23.5 million for the year ended December 31, 2016 and $10.9 million for the year ended December 31, 2015.

 

Total deposits decreased $3.8 million during the year ended December 31, 2016, while total deposits decreased $1.5 million during the year ended December 31, 2015. Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors. At December 31, 2016, certificates of deposit scheduled to mature within one year totaled $16.0 million. Our ability to retain these deposits will be determined in part by the interest rates we are willing to pay on such deposits.

 

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

 

 47

 

funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

 

At December 31, 2016 and 2015, our capital ratios were all above the minimum levels required for it to be considered a “well capitalized” financial institution at December 31, 2016 under “prompt corrective action” regulations. In order to be classified as “well-capitalized” under federal banking regulations, we were required to have Tier I and total risked-based capital ratios of 8.0% and 10.0%, respectively, as of December 31, 2016. Our Tier 1 and total risked-based capital was $11.7 million and $12.1 million, respectively, or 25.8% and 26.9% of total risk weighted assets at December 31, 2016. At December 31, 2015, our Tier 1 and total risked-based capital was $11.7 million and $12.2 million, respectively, or 29.3% and 30.4% of risk weighted assets.

 

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.

 

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.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)”. This ASU eliminates extraordinary items from US GAAP and will align more closely with International Accounting Standards 1, “Presentation of

 

 48

 

Financial Statements”. The adoption of this guidance on January 1, 2016 did not have a material effect on the operating results or financial position of the Company.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve current GAAP. The adoption of this guidance on January 1, 2016 did not have a material impact on the Company’s financial condition or results of operations.

 

In January, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities” requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 for public entities. The adoption of this guidance on January 1, 2018 is not expected to have a material effect on the operating results or financial position of the Company.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this guidance on January 1, 2019 is not expected to have a material effect on the operating results or financial position of the Company.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objectives of the ASU are to simplify accounting for the tax consequences of a stock payment and amend the manner in which excess tax benefits and a business’s payments to satisfy the tax obligation for

 

 49

 

recipients of the shares should be classified. The amendments: (i) allow companies to estimate the number of stock awards they expect to vest, and (ii) revise the withholding requirements for classifying stock awards as equity. The adoption of this guidance on January 1, 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current condition, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this guidance is effective for fiscal years and interim periods beginning after December 31, 2019. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which provides guidance on eight specific cash flow issues in order to reduce diversity in the manner in which certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

Impact of Inflation and Changing Price

 

Our financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

 

ITEM 7A.       Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

ITEM 8.          Financial Statements and Supplementary Data

 

The consolidated audited financial statements for Sunnyside Bancorp are a part of this Annual Report on Form 10-K and may be found beginning on page F-1.

 

ITEM 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

 50

 

ITEM 9A        Controls and Procedures

 

(a)          An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended December 31, 2016, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(b)          Management’s annual report on internal control over financial reporting.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

 

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, including the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (1992).” Based on such assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2016 is effective.

 

 51

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide only management’s report in this annual report.

 

ITEM 9B.       Other Information

 

None.

PART III

 

ITEM 10.        Directors, Executive Officers and Corporate Governance

 

Information called for by this item concerning the directors and officers will be included in Sunnyside’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the annual meeting of shareholders to be held on June 13, 2017 (the “Proxy Statement”), under the heading “Proposal 1—Election of Directors,” and is incorporated herein by reference.

 

The Company has adopted a Code of Ethics (“Code”) that applies to the Company’s principal executive officer, principal financial officer and all other employees and directors. The Code includes guidelines relating to compliance with laws, the ethical handling of actual or potential conflicts of interest, the use of corporate opportunities, protection and use of the Company’s confidential information, accepting gifts and business courtesies, accurate financial and regulatory reporting, and procedures for promoting compliance with, and reporting violations of, the Code. Persons interested in obtaining a copy of the Code of Ethics may do so by writing to the Company at: Sunnyside Bancorp, Inc., 56 Main Street, Irvington, New York 10533, Attention Corporate Secretary. 

 

Item 11.    Executive Compensation.

 

The information required by this Item 11 is incorporated herein by reference to the section entitled “Executive Compensation” in the Company’s Proxy Statement.

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The information required by this Item 12 is incorporated herein by reference to the section entitled “Principal Beneficial Owners of the Company’s Common Stock” in the Company’s Proxy Statement.

 

Item 13.    Certain Relationships and Related Transactions, and Director Independence.

 

The information required by this Item 13 related to certain relationships and related transactions is incorporated herein by reference to the section entitled “Certain Relationships and Related

 

 52

 

Transactions” in the Company’s Proxy Statement. The information required under this Item 13 related to Director Independence is incorporated herein by reference to the section entitled “Corporate Governance” in the Company’s Proxy Statement.

 

Item 14.    Principal Accounting Fees and Services.

 

The information required by this Item 14 is incorporated herein by reference to the section entitled “Fees Paid to Independent Registered Public Accounting Firm” in the Company’s Proxy Statement.

 

PART IV

 

ITEM 15.        Exhibits and Financial Statement Schedules

 

(a)(1)Financial Statements

 

The documents filed as a part of this Form 10-K are:

 

(A)Report of Independent Registered Public Accounting Firm;

 

(B)Consolidated Statements of Financial Condition at December 31, 2016 and 2015;

 

(C)Consolidated Statements of Operations for the years ended December 31, 2016 and 2015;

 

(D)Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016 and 2015;

 

(E)Consolidated Statements of Changes in Equity for the Years Ended December 31, 2016 and 2015;

 

(F)Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015; and

 

(G)Notes to Consolidated Financial Statements.

 

(a)(2)Financial Statement Schedules

 

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

 

(a)(3)Exhibits

 

3.1Articles of Incorporation of Sunnyside Bancorp*
3.2Bylaws of Sunnyside Bancorp*
4Form of Common Stock Certificate of Sunnyside Bancorp*
10.1Form of Employment Agreement with Timothy D. Sullivan**
10.2Form of Employment Agreement with Gerardina Mirtuono***
10.3Form of Employee Stock Ownership Plan*

 

 53

 

10.4Form of Employment Agreement with Edward Lipkus****
10.5Sunnyside Bancorp 2014 Equity Incentive Plan*****
21Subsidiaries
31.1Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101The following financial statements for the year ended December 31, 2016, formatted in XBRL:(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements.

 

 

*Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-187317), initially filed March 15, 2013.

 

**Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-187317), initially filed March 15, 2014 and the Current Report on Form 8-K filed on June 22, 2015.

 

***Incorporated by reference to the Current Report on Form 8-K (file no. 000-55005) filed on August 11, 2014.

 

****Incorporated by reference to the Current Report on Form 8-K (file no. 000-55005) filed on July 30, 2015.

 

*****Incorporated by reference to the Company’s proxy statement filed on August 11, 2014 (000-55005)

 

Item 16.    Form 10-K Summary

 

None.

 

 54

 

INDEX TO FINANCIAL STATEMENTS OF

SUNNYSIDE BANCORP

 

  Page
   
Report of Independent Registered Public Accounting Firm as of and for the year ended December 31, 2016 F-2
   
Report of Independent Registered Public Accounting Firm as of and for the year ended December 31, 2015 F-3
   
Consolidated Statements of Financial Condition  at December 31, 2016 and 2015 F-4
   
Consolidated Statements of Operations for the years ended  December 31, 2016 and 2015 F-5
   
Consolidated Statements of Comprehensive Income (Loss)  for the years ended December 31, 2016 and 2015 F-6
   
Consolidated Statements of Changes in Stockholders’ Equity  for the years ended December 31, 2016 and 2015 F-7
   
Consolidated Statements of Cash Flows for the  Years Ended December 31, 2016 and 2015 F-8
   
Notes to Consolidated Financial Statements F-9

 

 F-1 

 

 

 

 

 

REPORT OF Independent Registered Public Accounting Firm

 

 

To the Board of Directors

Sunnyside Bancorp, Inc. and Subsidiary

Irvington, New York

 

I have audited the accompanying consolidated statement of financial condition of Sunnyside Bancorp, Inc. and Subsidiary (the "Company"), as of December 31, 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. My responsibility is to express an opinion on these consolidated financial statements based on my audit.

 

I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.

 

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunnyside Bancorp, Inc. and Subsidiary, as of December 31, 2016, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

 

 

 

Alfred Fontanella

Fontanella Associates LLC

March 30, 2017

 

 

 

 

 
534 Union Boulevard   ▪   Totowa Boro, NJ   07512   ▪   973.595.5300 phone   ▪   973.595.5890 fax

 

 F-2 

 

 

 

REPORT OF Independent Registered Public Accounting Firm

 

To the Board of Directors

Sunnyside Bancorp, Inc. and Subsidiary

Irvington, New York

 

We have audited the accompanying consolidated statement of financial condition of Sunnyside Bancorp, Inc. and Subsidiary (the "Company"), as of December 31, 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunnyside Bancorp, Inc. and Subsidiary, as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

March 25, 2016

 

 
534 Union Boulevard   ▪   Totowa Boro, NJ   07512   ▪   973.595.5300 phone   ▪   973.595.5890 fax

 

 F-3 

 

SUNNYSIDE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

   December 31, 
   2016   2015 
Assets          
           
Cash and cash equivalents  $2,923,442   $3,326,660 
Securities held to maturity, net; approximate fair value of $4,011,000 (2016) and $4,859,000 (2015)   3,954,549    4,736,273 
Securities available for sale   29,331,278    30,750,302 
Loans receivable, net   48,045,062    47,092,298 
Premises and equipment, net   1,335,654    1,465,439 
Federal Home Loan Bank of New York and other stock, at cost   335,020    204,120 
Accrued interest receivable   443,062    332,474 
Cash surrender value of life insurance   2,197,348    2,139,657 
Deferred income taxes   1,270,575    1,231,696 
Other assets   438,478    329,880 
           
Total assets  $90,274,468   $91,608,799 
           
Liabilities and Stockholders'  Equity          
           
Liabilities:          
Deposits  $74,287,596   $78,109,759 
Advances from Federal Home Loan Bank of New York   3,000,000    - 
Advances from borrowers for taxes and insurance   684,468    628,645 
Other liabilities   1,070,811    1,016,871 
           
Total liabilities   79,042,875    79,755,275 
           
Commitments and contingencies   -    - 
           
Stockholders' equity:          
Serial preferred stock; par value $.01, 1,000,000 shares authorized, no shares issued   -    - 
Common stock; par value $.01, 30,000,000 shares authorized and 793,500 shares issued   7,935    7,935 
Additional paid-in capital   6,998,363    7,093,621 
Unallocated common stock held by the Employee Stock Ownership Plan   (466,606)   (488,818)
Retained earnings   6,237,637    6,355,056 
Accumulated other comprehensive (loss)   (1,545,736)   (1,114,270)
           
Total stockholders' equity   11,231,593    11,853,524 
           
Total liabilities and stockholders' equity  $90,274,468   $91,608,799 

 

See accompanying notes to consolidated financial statements.

 

 F-4 

 

SUNNYSIDE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended 
   December 31, 
   2016   2015 
         
Interest and dividend income:          
Loans  $2,109,169   $2,008,471 
Investment securities   183,531    185,273 
Mortgage-backed securities   528,715    475,376 
Federal funds sold and other earning assets   16,301    8,936 
           
Total interest and dividend income   2,837,716    2,678,056 
           
Interest expense:          
Deposits   311,267    349,701 
Borrowings   21,564    272 
           
Total interest expense   332,831    349,973 
           
Net interest income   2,504,885    2,328,083 
           
Provision for loan losses   3,650    67,188 
           
Net interest income after provision for loan losses   2,501,235    2,260,895 
           
Non-interest income:          
Fees and service charges   111,128    108,687 
Net gain on sale of securities   126,398    121,159 
Net gain on sale of loans   39,584    12,936 
Income on bank owned life insurance   57,691    66,202 
           
Total non-interest income   334,801    308,984 
           
Non-interest expense:          
Compensation and benefits   1,462,052    1,429,727 
Occupancy and equipment, net   356,131    371,825 
Data processing service fees   281,481    261,223 
Professional fees   422,887    354,861 
Federal deposit insurance premiums   46,783    61,662 
Advertising and promotion   52,438    44,050 
Other   253,195    225,173 
           
Total non-interest expense   2,874,967    2,748,521 
           
(Loss) before income taxes   (38,931)   (178,642)
           
Income tax (benefit)   78,488    (98,159)
           
Net (loss)  $(117,419)  $(80,483)
           
           
Basic and diluted loss per share  $(0.16)  $(0.11)
Weighted average shares outstanding          
basic and diluted   745,823    743,604 

 

See accompanying notes to consolidated financial statements.

 

 F-5 

 

SUNNYSIDE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   Year Ended 
   December 31, 
   2016   2015 
         
Net (loss)  $(117,419)  $(80,483)
           
Other comprehensive income (loss), before tax:          
Defined benefit pension plans:          
Net loss arising during the period   (55,177)   (351,252)
Amortization of loss included in net periodic plan cost   95,564    81,903 
           
Unrealized gains (losses) on securities available for sale:          
Unrealized holding gains (losses) arising during the period   (412,768)   (126,397)
Reclassification adjustment for (gains) losses included in operations   (121,891)   (99,026)
           
Other comprehensive income (loss), before tax   (494,272)   (494,772)
           
Income tax (benefit) expense related to items of other comprehensive income   (62,806)   (196,406)
           
Other comprehensive income (loss), net of tax   (431,466)   (298,366)
           
Comprehensive income (loss)  $(548,885)  $(378,849)

 

See accompanying notes to consolidated financial statements.

 

 F-6 

 

SUNNYSIDE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

 

                   Accumulated     
       Additional   Unallocated       Other     
   Common   Paid-in   Common Stock   Retained   Comprehensive   Total 
   Stock   Capital   Held by ESOP   Earnings   Income (Loss)   Equity 
                         
Balance at December 31, 2014  $7,935   $7,081,577   $(511,030)  $6,435,539   $(815,904)  $12,198,117 
                               
Net Loss   -    -    -    (80,483)   -    (80,483)
                               
ESOP shares allocated or committed to be released   -    1,020    22,212    -    -    23,232 
                               
Restricted stock awards earned   -    11,024    -    -    -    11,024 
                               
Other comprehensive income, net of tax   -    -    -    -    (298,366)   (298,366)
                               
Balance at December 31, 2015   7,935    7,093,621    (488,818)   6,355,056    (1,114,270)   11,853,524 
                               
Net Loss   -    -    -    (117,419)   -    (117,419)
                               
ESOP shares allocated or committed to be released   -    5,017    22,212    -    -    27,229 
                               
Restricted stock awards earned   -    22,050    -    -    -    22,050 
                               
Purchase of stock for restricted stock awards   -    (122,325)   -    -    -    (122,325)
                               
Other comprehensive income, net of tax   -    -    -    -    (431,466)   (431,466)
                               
Balance at December 31, 2016  $7,935   $6,998,363   $(466,606)  $6,237,637   $(1,545,736)  $11,231,593 

 

See accompanying notes to consolidated financial statements.

 

 F-7 

 

SUNNYSIDE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended 
   December 31, 
   2016   2015 
Cash flows from operating activities:          
Net (loss)  $(117,419)  $(80,483)
Adjustments to reconcile net (loss) to net cash provided by operating activities:          
Depreciation expense   145,204    152,368 
Amortization of premiums and accretion of discounts, net   266,145    167,026 
Amortization of deferred loan fees and costs, net   5,579    (155)
Provision for loan losses   3,650    67,188 
Net gain on sales of securities   (126,398)   (121,159)
Net gain on sales of loans   (39,584)   (12,936)
Increase in accrued interest receivable   (110,588)   (56,903)
Increase in cash surrender value of life insurance   (57,691)   (66,202)
Deferred income taxes   23,927    (106,055)
Net (increase) decrease in other assets   (108,598)   119,941 
Net increase in other liabilities   94,327    79,432 
Amortization of stock compensation plans   49,279    34,256 
Net cash provided by operating activities   27,833    176,318 
           
Cash flows from investing activities:          
Purchases of securities available for sale   (23,475,710)   (10,928,583)
Repayments and maturities of securities held to maturity   364,058    456,285 
Repayments and maturities of securities available for sale   5,512,414    4,291,159 
Proceeds from sales/calls of securities held to maturity   421,569    982,705 
Proceeds from sales/calls of securities available for sale   18,704,011    10,106,475 
(Purchase) redemption of Federal Home Loan Bank and other stock   (130,900)   3,700 
Loans purchased   (3,297,749)   (7,498,811)
Proceeds from sales of loans   1,461,175    304,716 
Loan originations, net of principal repayments   914,165    3,267,361 
Purchases of bank premises and equiment   (15,419)   (5,778)
Net cash provided by investing activities   457,614    979,229 
           
Cash flows from financing activities:          
Net decrease in deposits   (3,822,163)   (1,445,657)
Net increase in short term borrowings   3,000,000    - 
Net increase (decrease) in advances from borrowers for taxes and insurance   55,823    (103,112)
Purchase of stock for restricted stock awards   (122,325)   - 
Net cash used in financing activities   (888,665)   (1,548,769)
           
Net decrease in cash and cash equivalents   (403,218)   (393,222)
           
Cash and cash equivalents at beginning of year   3,326,660    3,719,882 
           
Cash and cash equivalents at end of year  $2,923,442   $3,326,660 
Supplemental Information:          
           
Cash paid for:          
Interest  $352,236   $349,991 
Income taxes, net  $19,728   $15,000 

 

See accompanying notes to consolidated financial statements.

 

 F-8 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following is a description of the more significant policies used in the presentation of the accompanying consolidated financial statements of Sunnyside Bancorp, Inc. and Subsidiary (the “Company”).

 

Principles of Consolidation

 

The consolidated financial statements are comprised of the accounts of Sunnyside Bancorp. Inc., and its wholly-owned subsidiary, Sunnyside Federal Savings and Loan Association of Irvington (the “Association”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Business

 

Sunnyside Federal Savings and Loan Association of Irvington is a community-oriented savings institution whose primary business is accepting deposits from customers within its market area (Westchester County, New York) and investing those funds in mortgage loans secured by one-to-four family residences and in mortgage-backed and other securities. To a significantly lesser extent, funds are invested in multi-family and commercial mortgage loans, commercial loans, and consumer loans. Customer deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (the “FDIC”). As a federally-chartered savings association, the Association’s primary regulator is the Office of the Controller of the Currency (the “OCC”).

 

Basis of Financial Statement Presentation

 

The financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates.

 

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the Company’s market area.

 

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, the Company considers all cash and amounts due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less to be cash equivalents.

 

Investment and Mortgage-Backed Securities

 

Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Securities classified as available-for-sale securities are reported at fair value, with unrealized holding gains or losses reported in a separate component of retained earnings. As of December 31, 2016 and 2015, the Company had no securities classified as trading.

 

The Company conducts a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. The evaluation of other-than-temporary impairment considers the duration and severity of the impairment, the Company’s intent and ability to hold the securities and assessments of the reason for the decline in value and the likelihood of a near-term recovery. If such a

 

 F-9 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Investment and Mortgage-Backed Securities (Cont’d)

 

decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to income as a component of non-interest expense.

 

The Company conducts a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. The evaluation of other-than-temporary impairment considers the duration and severity of the impairment, the Company’s intent and ability to hold the securities and assessments of the reason for the decline in value and the likelihood of a near-term recovery. If such a decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to income as a component of non-interest expense.

 

Premiums and discounts on securities are amortized by use of the level-yield method, over the life of the individual securities. Gain or loss on sales of securities is based upon the specific identification method.

 

Loans Receivable

 

Loans receivable are stated at unpaid principal balances less the allowance for loan losses and net deferred loan fees.

 

Recognition of interest on the accrual method is generally discontinued when interest or principal payments are ninety days or more in arrears, or when other factors indicate that the collection of such amounts is doubtful. At that time, a loan is placed on a nonaccrual status, and all previously accrued and uncollected interest is reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when factors indicating doubtful collectability no longer exist.

 

Allowance for Loan Losses

 

An allowance for loan losses is maintained at a level, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate. Management of the Association, in determining the provision for loan losses considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Company utilizes a two tier approach: (1) identification of problem loans and establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Company maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral, and financial condition of the borrowers. Specific loan losses are established for identified loans based on a review of such information and appraisals of the underlying collateral. General loan losses are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, and management's judgment. Although management believes that adequate specific and general loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may be necessary.

 

A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. An insignificant payment delay, which is defined as up to ninety days by the Company, will not cause a loan to be classified as impaired. A loan is not impaired during a period of delay in payment if the Association expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. The amount of loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. All loans identified as impaired are evaluated independently. The Association does not aggregate such loans for evaluation purposes.

 

 F-10 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Federal Home Loan Bank of New York stock

 

As a member of the Federal Home Loan Bank of New York (“FHLB”), the Company is required to acquire and hold shares of FHLB Class B stock. The holding requirement varies based on the Company’s activities, primarily its outstanding borrowings, with the FHLB. The investment in FHLB stock is carried at cost. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists.

 

Premises and Equipment

 

Premises and equipment are comprised of land, building, and furniture, fixtures, and equipment, at cost, less accumulated depreciation. Depreciation charges are computed on the straight-line method over the following estimated useful lives:

 

Building and improvements 5 to 40 years
Furniture, fixtures and equipment 2 to 10 years

 

Bank-Owned Life Insurance

 

Bank-owned life insurance (“BOLI”) is accounted for in accordance with Financial Accounting Standards Board “FASB”) guidance. The cash surrender value of BOLI is recorded on the statement of financial condition as an asset and the change in the cash surrender value is recorded as non-interest income. The amount by which any death benefits received exceeds a policy’s cash surrender value is recorded in non-interest income at the time of receipt. A liability is also recorded on the statement of financial condition for postretirement death benefits provided by the split-dollar endorsement policy. A corresponding expense is recorded in non-interest expense for the accrual of benefits over the period during which employees provide services to earn the benefits.

 

Income Taxes

 

Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the tax return differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these temporary differences is accounted as deferred taxes applicable to future periods. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized.

 

The Company accounts for uncertainty in income taxes recognized in the financial statements in accordance with accounting guidance which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation, no significant income tax uncertainties have been identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended December 31, 2016 and 2015. The Company’s policy is to recognize interest and penalties on unrecognized

  

 F-11 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Income Taxes (Cont’d)

 

tax benefits in income tax expense in the statement of operations. The amount of interest and penalties for the years ended December 31, 2016 and 2015 was immaterial. The Company is subject to U.S. federal income tax, as well as income tax of the State of New York. The Company is no longer subject to examination by taxing authorities for years before 2012.

 

Employee Benefits

 

Defined Benefit Plans:

 

The accounting guidance related to retirement benefits requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize, in comprehensive income, changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. The accounting guidance requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial condition.

 

401K Plan:

 

The Company has a 401(k) plan covering substantially all employees. The Company matches 50% of the first 6% contributed by participants and recognizes expense as its contributions are made.

 

Employee Stock Ownership Plan:

 

The employee stock ownership plan (ESOP) is accounted for in accordance with the provisions of ASC 718-40, “Employers’ Accounting for Employee Stock Ownership Plans.” The funds borrowed by the ESOP from the Company to purchase the Company’s common stock are being repaid from the Association’s contributions over a period of up to 25 years. The Company’s common stock not yet allocated to participants is recorded as a reduction of stockholders’ equity at cost. Compensation expense for the ESOP is based on the market price of the Company’s stock and is recognized as shares are committed to be released to participants.

 

Equity Incentive Plan:

 

On July 17, 2014, the Board of Directors adopted the Sunnyside Bancorp, Inc. 2014 Equity Incentive Plan. (“the Stock Incentive Plan”) which was approved by shareholders at the Company’s 2014 Annual Meeting of Shareholders held on September 16, 2014. Stock options and restricted stock may be granted to directors, officers and other employees of the Company. The maximum number of shares which may be issued upon exercise of the options under the plan cannot exceed 79,350 shares. The maximum number of shares of stock that may be issued as restricted stock awards cannot exceed 23,805.

 

The Stock Incentive Plan will remain in effect as long as any awards under it are outstanding; however, no awards may be granted under the Stock Incentive Plan on or after the 10-year anniversary of the effective date of the Stock Incentive Plan or July 17, 2024. Under FASB ASC Topic 718, the Company will recognize compensation expense on its income statement over the requisite service period or performance period based on the grant date fair value of stock options and other equity-based compensation (such as restricted stock).

 

 F-12 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, and the actuarial gains and losses of the pension plan, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

Concentration of Credit Risk and Interest-Rate Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, investment and mortgage-backed securities and loans. Cash and cash equivalents include amounts placed with highly rated financial institutions. Investment securities include securities backed by the U.S. Government and other highly rated instruments. The Company’s lending activity is primarily concentrated in loans collateralized by real estate in the State of New York. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in the state.

 

The Company is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to make loans secured by real estate in the State of New York. The potential for interest-rate risk exists as a result of the shorter duration of interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of the Company's assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility.

 

Earnings Per Share

 

Basic earnings per common share, or EPS, are computed by dividing net income by the weighted-average common shares outstanding during the year. The weighted-average common shares outstanding includes the weighted-average number of shares of common stock outstanding less the weighted average number of unallocated shares held by the ESOP and the unvested shares of restricted stock. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate to outstanding stock options and non-vested restricted stock grants.  Potential common shares related to stock options are determined using the treasury stock method.

 

Advertising Costs

 

It is the Company’s policy to expense advertising costs in the period in which they are incurred.

 

Subsequent Events

 

The Company has evaluated all events subsequent to the balance sheet date of December 31, 2016, through the date of this report, and has determined that there are no subsequent events that require disclosure under FASB guidance.

 

 

 F-13 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)”. This ASU eliminates extraordinary items from US GAAP and will align more closely with International Accounting Standards 1, “Presentation of Financial Statements”. The adoption of this guidance on January 1, 2016 did not have a material effect on the operating results or financial position of the Company.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve current GAAP. The adoption of this guidance on January 1, 2016 did not have a material impact on the Company’s financial condition or results of operations.

 

In January, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities” requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 for public entities. The adoption of this guidance on January 1, 2018 is not expected to have a material effect on the operating results or financial position of the Company.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Recent Accounting Pronouncements (Cont’d)

 

use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018,

including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this guidance on January 1, 2019 is not expected to have a material effect on the operating results or financial position of the Company.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objectives of the ASU are to simplify accounting for the tax consequences of a stock payment and amend the manner in which excess tax benefits and a business’s payments to satisfy the tax obligation for recipients of the shares should be classified. The amendments: (i) allow companies to estimate the number of stock awards they expect to vest, and (ii) revise the withholding requirements for classifying stock awards as equity. The adoption of this guidance on January 1, 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current condition, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this guidance is effective for fiscal years and interim periods beginning after December 31, 2019. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which provides guidance on eight specific cash flow issues in order to reduce diversity in the manner in which certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

2. MUTUAL TO STOCK CONVERSION AND LIQUIDATION ACCOUNT

 

On July 15, 2013, the Association completed its mutual-to-stock conversion, and the Company consummated its initial stock offering. The Company sold 793,500 shares of its common stock, including 55,545 shares purchased by the Association’s employee stock ownership plan (“ESOP”), at a price of $10.00 per share, in a subscription offering, for gross offering proceeds of $7,935,000. The cost of conversion and the stock offering were deferred and deducted from the proceeds of the offering. Conversion costs incurred totaled $845,000 resulting in net proceeds of $6.5 million after also deducting the shares acquired by the ESOP.

 

In accordance with applicable federal conversion regulations, at the time of the completion of the mutual-to-stock conversion, the Company established a liquidation account in the Association in an amount equal to the Association’s total retained earnings as of the latest balance sheet date in the final prospectus used in the

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

2. MUTUAL TO STOCK CONVERSION AND LIQUIDATION ACCOUNT (Cont’d)

 

conversion.  Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account in the event of a complete liquidation of the Association, and only in such event.  This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any December 31 and will cease to exist if the account is closed.  The liquidation account will never be increased despite any increase after conversion in the related deposit balance. The Company may not declare, pay a dividend on, or repurchase any of its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

 

3. SECURITIES

 

   December 31, 2016 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
Securities held to maturity:                    
U.S. government and agency obligations  $2,000,000   $11,698   $-   $2,011,698 
State, county, and municipal obligations   550,234    -    8,225    542,009 
Mortgage-backed securities   1,404,315    52,999    -    1,457,314 
                     
   $3,954,549   $64,697   $8,225   $4,011,021 
                     
Securities available for sale:                    
U.S. government and agency obligations  $3,198,932   $-   $6,818   $3,192,114 
Mortgage-backed securities   26,905,021    5,575    771,432    26,139,164 
                     
   $30,103,953   $5,575   $778,250   $29,331,278 

 

   December 31, 2015 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
Securities held to maturity:                    
U.S. government and agency obligations  $2,000,000   $49,394   $-    2,049,394 
State, county, and municipal obligations   816,364    15,255    571    831,048 
Mortgage-backed securities   1,919,909    59,112    -    1,979,021 
                     
   $4,736,273   $123,761   $571   $4,859,463 
                     
Securities available for sale:                    
U.S. government and agency obligations  $5,660,537   $-   $45,055    5,615,482 
Mortgage-backed securities   25,327,782    54,108    247,070    25,134,820 
                     
   $30,988,319   $54,108   $292,125   $30,750,302 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   

3. SECURITIES (Cont’d)

 

Mortgage-backed securities consist of securities guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac, and the Small Business Administration with amortized costs of $1.7 million, $16.8 million, $6.7 million, and $3.1 million, respectively, at December 31, 2016 ($2.3 million, $11.5 million, $10.0 million, and $3.6 million, respectively, at December 31, 2015).

 

Proceeds from the sale/call of securities available for sale amounted to $18,704,000 and $10,106,000 for the years ended December 31, 2016 and December 31, 2015, respectively. Net gains of $122,000 and $99,000 were recognized on these sales/calls for the years ended December 31, 2016 and 2015, respectively.

 

Proceeds from the sale/calls of securities held to maturity amounted to $422,000 and $983,000 for the years ended December 31, 2016 and 2015, respectively. Net gains of $4,500 and $22,100 were recognized on these sales, respectively. The sale of the securities occurred after the Company had already collected a substantial portion (at least 85%) of the principal outstanding at acquisition due to prepayments on the debt securities.

 

The following is a summary of the amortized cost and fair value of securities at December 31, 2016 and 2015, by remaining period to contractual maturity. Actual maturities may differ from these amounts because certain debt security issuers have the right to call or redeem their obligations prior to contractual maturity. In addition, mortgage backed securities that amortize monthly are listed in the period the security is legally set to pay off in full.

 

   December 31, 2016 
   Held to Maturity   Available for Sale 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
                 
Within one year  $-   $-   $2,199,549   $2,199,424 
After one to five years   204,107    201,678    999,383    992,690 
After five to ten years   -    -    2,905,702    2,836,866 
After ten years   3,750,442    3,809,343    23,999,319    23,302,298 
                     
   $3,954,549   $4,011,021   $30,103,953   $29,331,278 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3. SECURITIES (Cont’d)

 

   December 31, 2015 
   Held to Maturity   Available for Sale 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
                 
Within one year  $65,000   $65,637   $-   $- 
After one to five years   405,463    410,756    999,176    988,268 
After five to ten years   -    -    6,646,014    6,592,105 
After ten years   4,265,810    4,383,070    23,343,129    23,169,929 
                     
   $4,736,273   $4,859,463   $30,988,319   $30,750,302 

 

The following tables summarize the fair values and unrealized losses of securities with an unrealized loss at December 31, 2016 and 2015, segregated between securities that have been in an unrealized loss position for less than one year, or one year or longer, at the respective dates.

 

   December 31, 2016 
   Under One Year   One Year or More 
       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss 
                 
Securities available for sale:                    
U.S. government and agency obligations  $3,192,114   $6,818   $-   $- 
Mortgage-backed securities   22,915,969    669,270    2,354,733    102,162 
                     
    26,108,083    676,088    2,354,733    102,162 
Securities held to maturity:                    
State, county, and municipal obligations   542,009    8,225    -    - 
                     
   $26,650,092   $684,313   $2,354,733   $102,162 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3. SECURITIES (Cont’d)

 

   December 31, 2015 
   Under One Year   One Year or More 
       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss 
                 
Securities available for sale:                    
U.S. government and agency obligations  $4,627,215   $34,146   $988,267   $10,909 
Mortgage-backed securities   16,181,086    128,104    3,983,918    118,966 
                     
    20,808,301    162,250    4,972,185    129,875 
Securities held to maturity:                    
State, county, and municipal obligations   204,986    571    -    - 
                     
   $21,013,287   $162,821   $4,972,185   $129,875 

 

The unrealized losses are primarily due to changes in market interest rates subsequent to purchase. At December 31, 2016, a total of 34 securities were in an unrealized loss position (40 at December 31, 2015). The Company generally purchases securities issued by Government Sponsored Enterprises (GSE). Accordingly, it is expected that the GSE securities would not be settled at a price less than the Company’s amortized cost basis. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2016 and December 31, 2015 since the decline in market value is attributable to changes in interest rates and not credit quality and the Company has the intent and ability to hold these investments until there is a full recovery of the unrealized loss, which may be at maturity.

 

Securities held to maturity, with a carrying value of approximately $2,000,000 and securities available for sale, with a carrying value of approximately $7,443,000 at December 31, 2016 have been pledged to secure advances from the Federal Home Loan Bank of New York.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. LOANS RECEIVABLE, NET

 

   December 31, 
   2016   2015 
Mortgage loans:          
Residential 1-4 family  $24,808,914   $29,156,224 
Commercial and multi-family   15,790,917    13,816,059 
Home equity lines of credit   524,414    407,764 
           
    41,124,245    43,380,047 
           
Other loans:          
Secured by savings accounts   11,390    18,201 
Student   5,743,338    1,932,791 
Commercial   1,493,323    2,171,795 
           
    7,248,051    4,122,787 
           
Total loans   48,372,296    47,502,834 
           
Less:          
Deferred loan fees (costs), net   (139,659)   (52,707)
Allowance for loan losses   466,893    463,243 
           
    327,234    410,536 
           
   $48,045,062   $47,092,298 

 

In the ordinary course of business, the Company makes loans to its directors, executive officers, and their associates (related parties) on the same terms as those prevailing at the time of origination for comparable loans with other borrowers. The unpaid principal balances of related party loans were approximately $ 160,000 and $169,000 at December 31, 2016 and 2015, respectively.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. LOANS RECEIVABLE, NET (Cont’d)

 

Activity in the allowance for loan losses is summarized as follows:

 

   Year Ended 
   December 31, 
   2016   2015 
         
Balance at beginning of year  $463,243   $396,055 
Provision for loan losses   3,650    67,188 
           
Balance at end of year  $466,893   $463,243 

 

The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. There are no specific allowances as of December 31, 2016 and 2015. The general component covers pools of loans by loan class not considered impaired, as well as smaller balance homogeneous loans, such as one-to-four family real estate, home equity lines of credit and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.  These qualitative risk factors include:

 

1.Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

 

2.National, regional, and local economic and business conditions including the value of underlying collateral for collateral dependent loans.

 

3.Nature and volume of the portfolio and terms of loans.

 

4.Experience, ability, and depth of lending management and staff and the quality of the Association’s loan review system.

 

5.Volume and severity of past due, classified and nonaccrual loans.

 

6.Existence and effect of any concentrations of credit and changes in the level of such concentrations.

 

7.Effect of external factors, such as competition and legal and regulatory requirements.

 

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 calculation.

 

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

 

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of pass, special mention, substandard, doubtful and loss.

 

Loan classifications are defined as follows:

 

Pass — These loans are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

 

Special Mention — These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects.

 

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4. LOANS RECEIVABLE, NET (Cont’d)

 

Substandard — These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful — These loans have all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make the full recovery of our principal balance highly questionable and improbable on the basis of currently known facts, conditions, and values. The likelihood of a loss on an asset or portion of an asset classified as doubtful is high. Its classification as Loss is not appropriate, however, because pending events are expected to materially affect the amount of loss.

 

Loss — These loans are considered uncollectible and of such little value that a charge-off is warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur.

 

One of the primary methods the Company uses as an indicator of the credit quality of their portfolio is the regulatory classification system. The following table reflects the credit quality indicators by portfolio segment and class, at the dates indicated:

 

   December 31, 2016 
   Mortgage Loans             
       Commercial           Commercial     
   Residential   and           and     
   1-4 Family   Multi-Family   Home Equity   Student   Other   Total 
   (In thousands) 
                         
Pass  $24,249   $15,791   $503   $5,743   $1,505   $47,791 
Special Mention   -    -    -    -    -    - 
Substandard   560    -    21    -    -    581 
                               
Total  $24,809   $15,791   $524   $5,743   $1,505   $48,372 

 

   December 31, 2015 
   Mortgage Loans             
       Commercial           Commercial     
   Residential   Real Estate and           and     
   1-4 Family   Multi-Family   Home Equity   Student   Other   Total 
   (In thousands) 
                         
Pass  $28,458   $12,676   $383   $1,933   $2,190   $45,640 
Special Mention   409    1,140    25    -    -    1,574 
Substandard   289    -    -    -    -    289 
                               
Total  $29,156   $13,816   $408   $1,933   $2,190   $47,503 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. LOANS RECEIVABLE, NET (Cont’d)

 

The following table provides information about loan delinquencies at the dates indicated:

 

   December 31, 2016 
                           90 Days 
                           or More 
   30-59   60-89   90 Days               Past Due 
   Days   Days   or More   Total   Current   Total   and 
   Past Due   Past Due   Past Due   Past Due   Loans   Loans   Accruing 
   (In thousands) 
                             
Residential 1-4 family  $-   $272   $337   $609   $24,200   $24,809   $- 
Commercial and multi-family   -    -    -    -    15,791    15,791    - 
Home equity lines of credit   -    -    21    21    503    524    - 
Student loans   5    10    -    15    5,728    5,743    - 
Other loans   -    -    -    -    1,505    1,505    - 
                                    
   $5   $282   $358   $645   $47,727   $48,372   $- 

 

   December 31, 2015 
                           90 Days 
                           or More 
   30-59   60-89   90 Days               Past Due 
   Days   Days   or More   Total   Current   Total   and 
   Past Due   Past Due   Past Due   Past Due   Loans   Loans   Accruing 
   (In thousands) 
                             
Residential 1-4 family  $-   $279   $289   $568   $28,588   $29,156   $- 
Commercial and multi-family   -    737    -   $737    13,079    13,816    - 
Home equity lines of credit   -    25    -   $25    383    408    - 
Student loans   -    -    -   $-    1,933    1,933      
Other loans   -    -    -   $-    2,190    2,190    - 
                                    
   $-   $1,041   $289   $1,330   $46,173   $47,503   $- 

 

There were no impaired loans or troubled debt restructured loans at December 31, 2016 and 2015.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

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4. LOANS RECEIVABLE, NET (Cont’d)

 

The following is a summary of loans, by loan type, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at the dates indicated:

 

   December 31, 
   2016   2015 
   (In thousands) 
Residential 1-4 family  $609   $289 
Commercial and multi-family   -    - 
Home equity lines of credit   21    - 
Student loans   -    - 
Other loans   -    - 
           
Total non-accrual loans   630    289 
           
Accruing loans delinquent 90 days or more   -    - 
           
Total non-performing loans  $630   $289 

 

The total amount of interest income on non-accrual loans that would have been recognized if interest on all such loans had been recorded based upon original contract terms amounted to approximately $39,500 and $20,600 for the year ended December 31, 2016 and 2015, respectively. The total amount of interest income recognized on non-accrual loans amounted to approximately $36,800 and $4,900 during the year ended December 31, 2016 and 2015, respectively.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. LOANS RECEIVABLE, NET (Cont’d)

 

The following tables present the activity in the allowance for loan losses by loan type for the years indicated:

 

   Year Ended 
   December 31, 2016 
   Mortgage Loans                 
       Commercial                     
   Residential   and                     
   1-4 Family   Multi-Family   Home Equity   Student   Other   Unallocated   Total 
   (In thousands) 
                             
Beginning balance  $315   $130   $3   $14   $1   $-   $463 
Provision for loan losses   (18)   8    2    6    6    -    4 
                                    
Ending Balance  $297   $138   $5   $20   $7   $-   $467 

 

   Year Ended 
   December 31, 2015 
   Mortgage Loans                 
       Commercial                     
   Residential   and                     
   1-4 Family   Multi-Family   Home Equity   Student   Other   Unallocated   Total 
   (In thousands) 
                             
Beginning balance  $258   $91   $3   $-   $18   $12   $382 
Provision for loan losses   57    39    -    14    (17)   (12)   81 
                                    
Ending Balance  $315   $130   $3   $14   $1   $-   $463 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. PREMISES AND EQUIPMENT, NET

 

   December 31, 
   2016   2015 
         
Land and land improvements  $766,939   $766,939 
Building and building improvements   2,502,142    2,491,442 
Furniture, fixtures and equipment   857,110    852,391 
           
    4,126,191    4,110,772 
Less accumulated depreciation   (2,790,537)   (2,645,333)
           
   $1,335,654   $1,465,439 

 

Depreciation expense for the years ended, December 31, 2016 and 2015, was $145,204 and $152,368, respectively.

 

6. ACCRUED INTEREST RECEIVABLE

 

   December 31, 
   2016   2015 
         
Loans  $337,844   $198,578 
Mortgage-backed securities   78,400    74,343 
Investment securities   26,818    59,553 
           
   $443,062   $332,474 

 

7. DEPOSITS

 

   December 31, 
   2016   2015 
   Weighted       Weighted     
   Average       Average     
   Rate   Amount   Rate   Amount 
                 
Non-interest bearing checking   0.00%  $4,242,735    0.00%  $3,617,174 
NOW accounts   0.05%   12,354,063    0.05%   11,396,225 
Regular savings and clubs   0.10%   22,190,260    0.10%   22,836,459 
Super saver   0.15%   6,957,107    0.15%   7,030,486 
Money market   0.10%   2,946,249    0.10%   3,100,017 
                     
         48,690,414         47,980,361 
                     
Certificates of deposit   0.83%   25,597,182    0.99%   30,129,398 
                     
    0.34%  $74,287,596    0.44%  $78,109,759 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7. DEPOSITS (Cont’d)

 

Certificates of deposit are summarized by remaining period to contractual maturity as follows:

 

   December 31, 
   2016   2015 
   (In thousands) 
         
One year or less  $15,988   $21,996 
Over one to three years   8,333    7,078 
Over three years   1,276    1,055 
           
   $25,597   $30,129 

 

Certificates of deposit with balances of $100,000 or more totaled $9.0 million and $11.1 million at December 31, 2016 and 2015, respectively. The Company’s deposits are insurable to applicable limits established by the Federal Deposit Insurance Corporation. The maximum deposit insurance amount is $250,000.

 

Interest expense on deposits is summarized as follows:

 

   Year Ended 
   December 31, 
   2016   2015 
         
NOW  $6,488   $5,575 
Savings and clubs   33,343    33,735 
Money market   2,985    3,035 
Certificates of deposit   268,451    307,356 
           
   $311,267   $349,701 

 

8. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK

 

Advances from the Federal Home Loan Bank of New York include a 30-day advance in the amount of $3,000,000 at an interest rate of 0.81%, maturing on January 13, 2017.

 

See Note 3 to the consolidated financial statements regarding securities pledged as collateral for this advance.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9. INCOME TAXES

 

The components of income taxes are summarized as follows:

 

   Year Ended 
   December 31, 
   2016   2015 
         
Current tax expense (benefit):          
Federal  $-   $(802)
State   19,395    8,698 
           
    19,395    7,896 
           
Deferred tax expense (benefit):          
Federal   (40,111)   (84,582)
State   (14,032)   (21,473)
           
    (54,143)   (106,055)
           
State valuation allowance, net   113,236    - 
           
   $78,488   $(98,159)

 

The following is a reconciliation of expected income taxes (benefit), computed at the applicable federal statutory rate of 34% to the actual income tax expense (benefit):

 

   Year Ended 
   December 31, 
   2016   2015 
         
Federal income tax expense (benefit)  $(13,237)  $(60,738)
State income tax expense (benefit)   3,540    (8,432)
Income from life insurance   (19,615)   (22,509)
Tax-exempt interest   (6,107)   (8,473)
Other   671    1,993 
State valuation allowance, net   113,236    - 
           
Actual income tax (benefit)  $78,488   $(98,159)
           
Effective income tax rate   -49.86%(A)   -54.95%

 

(A) Without consideration of the valuation allowance on the New York State net deferred tax asset.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9. INCOME TAXES (Cont’d)

 

The components of deferred tax assets and liabilities are as follows:

 

   December 31, 
   2016   2015 
         
Deferred tax assets:          
Depreciation  $120,917   $91,185 
Benefit plan liabilities   184,596    173,325 
Allowance for loan losses   165,192    152,373 
Charitable contribution carryover   4,113    3,830 
Net operating loss carryover   722,316    593,090 
Unfunded pension liability   533,578    638,997 
Unrealized loss on securities available for sale   262,710    94,485 
           
    1,993,422    1,747,285 
           
Valuation allowance   (171,569)   - 
           
Total deferred tax assets   1,821,853    1,747,285 
           
Deferred tax liabilities:          
Discounts on investments   1,069    849 
Prepaid benefit plans   533,584    511,328 
Net deferred loan costs/fees   15,533    3,412 
Other   1,092    - 
           
Total deferred tax liabilities   551,278    515,589 
           
Net deferred tax assets  $1,270,575   $1,231,696 

 

At December 31, 2016, the Company had a federal net operating loss carryover of $1,584,000 and a New York state net operating loss carryover of $2,130,000 available to offset future taxable income.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result of New York State tax law changes, a valuation allowance of $172,000 was established during 2016 on the New York State portion of the net deferred tax asset. Based upon projections of future taxable income, management believes it is more likely than not the Company will realize the remaining deferred tax asset.

 

The Association qualifies as a savings and loan association under the provisions of the Internal Revenue Code and, therefore, was permitted, prior to January 1, 1996, to deduct from federal taxable income an allowance for bad debts based on eight percent of taxable income before such deduction less certain adjustments, subject to certain limitations. Beginning January 1, 1996, the Association, for federal income tax purposes, must calculate its bad debt deduction using either the experience or the specific charge off method. Retained earnings at December 31, 2016 included approximately $1,700,000 of such bad deductions for which income taxes have not been provided.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10. BENEFIT PLANS

 

Pension Plan

 

All eligible Company employees are included in a non-contributory defined benefit pension plan. Effective April 15, 2008, the plan was “Frozen.” At the freeze date, no employee will be permitted to commence or recommence participation in the plan and no further benefits will accrue to any plan participants. In addition, compensation received on or after the plan freeze date will not be considered for any purpose under the plan.

 

The following table sets forth the change in benefit obligation, change in plan assets, and a reconciliation of the funded status:

 

   December 31, 
   2016   2015 
         
Change in projected benefit obligation:          
Projected benefit obligation at beginning of year  $2,527,286   $2,551,657 
Interest cost   105,479    106,575 
Actuarial loss   79,868    52,361 
Benefits paid   (183,307)   (183,307)
           
Projected benefit obligation at end of year   2,529,326    2,527,286 
           
Change in fair value of plan assets:          
Fair value of plan assets at beginning of year   2,205,668    2,493,974 
Actual return on plan assets   189,280    (104,999)
Employer contributions   -    - 
Benefits paid   (183,307)   (183,307)
           
Fair value of plan assets at end of year   2,211,641    2,205,668 
           
Funded status of plan included in other liabilitites  $(317,685)  $(321,618)

 

As of December 31, 2016 and 2015, the components of accumulated other comprehensive loss on a pretax basis are an unrecognized actuarial loss of $1,569,348 and $1,609,735, respectively.

 

The estimated net actuarial loss for the pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2017 is $135,017.

 

The weighted average assumptions used to determine the Plan’s benefit obligation are as follows:

 

   December 31, 
   2016   2015 
         
Discount rate   4.50%   4.50%
Salary increase rate   N/A    N/A 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

10. BENEFIT PLANS (Cont’d)

 

Pension Plan (Cont’d)

 

The components of net periodic plan cost is as follows:

 

   Year Ended 
   December 31, 
   2016   2015 
         
Components of net periodic plan cost (credit):          
Interest cost  $105,479   $106,575 
Expected return on assets   (164,589)   (193,893)
Amortization of unrecognized loss   95,564    81,903 
           
Net periodic plan cost (credit) included in compensation and benefits expense   36,454    (5,415)
           
Changes in benefit obligation recognized in other comprehensive (income) loss:          
Net loss   55,177    351,252 
Amortization of loss   (95,564)   (81,903)
           
Benefit obligation recognized in other comprehensive (income) loss   (40,387)   269,349 
           
Total recognized in net periodic plan cost and other comprehensive (income) loss  $(3,933)  $263,934 

 

The weighted average assumptions used to determine net periodic plan cost are as follows:

 

   Year Ended 
   December 31, 
   2016   2015 
         
Discount rate   4.50%   4.50%
Expected rate of return on plan assets   8.00%   8.00%
Rate of compensation increase   N/A    N/A 
Amortization period   9.75    14.20 

 

Investment Policies and Strategies

 

Wilmington Trust Retirement & Institutional Services Company acts as Trustee for the Plan. The Plan assets are managed by Pinnacle Associates, Ltd.

 

The long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow. A broadly diversified combination of equity and fixed income portfolios and various risk management techniques are used to help achieve these objectives.

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

10. BENEFIT PLANS (Cont’d)

 

Pension Plan (Cont’d)

 

Allowable investments include common stocks, preferred stocks, fixed income securities, depository receipts, money market funds, real estate investment trusts, and publicly traded limited partnerships with the following limitations:

 

·The account will be a balanced account, with a target of 60% equity securities and 40% fixed income securities ratio which may vary based on the portfolio manager’s discretion.

 

·The account will generally not invest more than 20% of its net assets in cash and cash equivalents.

 

·The account will invest, under normal circumstances, between 20% to 60% of its net assets in fixed income securities.

 

·The account will invest, under normal circumstances, between 30% to 80% of its net assets in equity securities. The equities will be mostly of a large capitalization nature.

 

·The account will generally hold between 50 to 90 equity securities.

 

·The maximum equity position size will be limited to 5% of net assets at the time of purchase.

 

·For equities, each significant economic sector will be considered for the investment.

 

·The account may invest up to 15% of its net assets in companies incorporated outside of the United States, at the time of purchase.

 

·The account will not sell securities short. Any short transactions in futures, swaps, structured products, and call options will apply to this limit.

 

The investment goal is to achieve investment results that will contribute to the proper funding of the pension plan by exceeding the rate of inflation over the long term.

 

Determination of Long-Term Rate-of-Return

 

The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return on in the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are applied to the plan’s target allocation, the result is an expected rate of return of 4% to 8%.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

10. BENEFIT PLANS (Cont’d)

 

Pension Plan (Cont’d)

 

Estimated Future Benefit Payments

 

The following benefit payments, which reflect expected future services, as appropriate, are expected to be paid:

 

Fiscal year ending    
December 31,    
     
2017   187,562 
2018   190,162 
2019   199,672 
2020   201,571 
2021   201,571 
Years 2022-2026   1,041,468 
      
   $2,022,006 

 

The Company expects to contribute cash of $33,000 to the plan in 2017.

 

The fair values of the pension plan assets at December 31, 2016 by asset category (see note 13 for the definition of levels) are as follows:

 

       Quoted Prices         
       in Active         
       Markets for   Significant   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
Asset Category  Total   (Level 1)   (Level 2)   (Level 3) 
                 
Cash and money market funds  $241,389   $241,389   $-   $- 
Corporate bonds (a)   443,096    -    443,096    - 
Equity securities (b)   1,527,156    1,527,156    -    - 
                     
Total  $2,211,641   $1,768,545   $443,096   $- 

 

(a)Includes seven corporate bonds due within ten years rated BB- or better by the S&P.

 

(b)Includes 61 companies spread over various market sectors.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

10. BENEFIT PLANS (Cont’d)

 

Pension Plan (Cont’d)

 

The fair values of the Association’s pension plan assets at December 31, 2015, by asset category (see note 13 for the definition of levels) are as follows:

 

       Quoted Prices         
       in Active         
       Markets for   Significant   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
Asset Category  Total   (Level 1)   (Level 2)   (Level 3) 
                 
Cash and money market funds  $419,998   $419,998   $-   $- 
Corporate bonds (a)   498,109    -    498,109    - 
Equity securities (b)   1,287,561    1,287,561    -    - 
                     
Total  $2,205,668   $1,707,559   $498,109   $- 

 

(a)Includes eight corporate bonds due within ten years rated BBB- or better by the S&P.

 

(b)Includes 62 companies spread over various market sectors.

 

Employee Savings Plan

 

The Company also maintains a defined contribution plan for eligible employees under Section 401(k) of the Internal Revenue Service (“IRS”) Code. All employees who meet the plan eligibility requirements may elect to participate in the plan by making contributions up to the maximum permissible IRS limit. The Company makes matching contributions limited to 50% of the participant’s contributions up to 6% of compensation. Savings plan expense was approximately $22,000 and $24,000 for the years ended December 31, 2016 and 2015, respectively.

 

Employee Stock Ownership Plan

 

Effective upon completion of the Company’s initial public offering in July 2013, the Association established an Employee Stock Ownership Plan (“ESOP”) for all eligible employees who complete a twelve-month period of employment with the Association, have attained the age of 21 and complete at least 1,000 hours of service in a plan year. The ESOP used $555,450 in proceeds from a term loan obtained from the Company to purchase 55,545 shares of Company common stock. The remaining term loan principal is payable over 25 equal annual installments through December 31, 2037. The interest rate on the term loan is the prime rate. Each year, the Association intends to make discretionary contributions to the ESOP, which will be equal to principal and interest payments required on the term loan. The Association may substitute dividends paid, if any, on the Company common stock held by the ESOP for discretionary contributions.

 

Shares purchased with the loan proceeds provide collateral for the term loan and are held in a suspense account for future allocations among participants. Contributions to the ESOP and shares released from the suspense account are to be allocated among the participants on the basis of compensation, as described by the ESOP, in the year of allocation.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

10. BENEFIT PLANS (Cont’d)

 

Employee Stock Ownership Plan (Cont’d)

 

ESOP shares pledged as collateral were initially recorded as unearned ESOP shares in the consolidated statements of financial condition. Thereafter, on a monthly basis, 185 shares are committed to be released, compensation expense is recorded equal to the number of shares committed to be released times the monthly average market price of the shares, and the committed shares become outstanding for basic net income per common share computations. ESOP compensation expense was approximately $27,000, and $23,000 for the years ended December 31, 2016 and 2015, respectively.

 

The ESOP shares were as follows:

 

   December 31, 
   2016   2015 
         
Allocated shares   6,663    4,442 
Shares committed to be released   2,223    2,223 
Unearned shares   46,659    48,880 
           
Total ESOP shares   55,545    55,545 
           
Fair value of unearned shares  $620,565   $562,120 

 

Equity Incentive Plan

 

On July 17, 2014, the Board of Directors adopted the Sunnyside Bancorp, Inc. 2014 Equity Incentive Plan (the “ Stock Incentive Plan”) which was approved by shareholders at the Company’s 2014 Annual Meeting of Shareholders held on September 16, 2014. Stock options and restricted stock may be granted to directors, officers and other employees of the Company. The maximum number of shares which may be issued upon exercise of the options under the plan cannot exceed 79,350 shares. The maximum number of shares of stock that may be issued as restricted stock awards cannot exceed 23,805.

 

On June 16, 2015, the Company granted 10,500 shares of restricted stock to certain executive officers, with a grant date fair value of $10.50 per share. Twenty percent of the shares awarded vest annually. Management recognizes expense for the fair value of those awards on a straight line basis over the requisite service period. Plan expense was approximately $22,000 and $11,000 for the years ended December 31, 2016 and 2015, respectively. During the year ended December 31, 2016, 2,100 shares of restricted stock vested. No restricted stock awards vested during the year ended December 31, 2015. Expected future expense relating to these non-vested restricted shares at December 31, 2016 is $77,175 over a weighted average period of 3.5 years. There were no stock options outstanding as of December 31, 2016.

 

Other Retirement Benefits

 

Effective June 2002, the Company entered into salary continuation agreements with certain of its officers. The agreements provide for specified benefit payments for life, 15-year period certain commencing at normal retirement, as well as payments upon early retirement, disability and death. The amounts payable under the agreements vest at an annual rate of 5% over 20 years and are computed as a specified percentage of a defined total compensation base,

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10. BENEFIT PLANS (Cont’d)

 

Other Retirement Benefits (Cont’d)

 

less (i) benefits under the Company’s pension plan, 401(k) plan and deferred compensation agreements, and (ii) a portion of social security benefits. The Association also entered into agreements providing for split-dollar life insurance death benefits based on each officer’s total compensation, as defined. The salary continuation and split-dollar agreements are unfunded, non-qualified benefits plans. However, the Company has purchased life insurance policies held by a Rabbi Trust in consideration of its obligations under the salary continuation agreements and certain prior deferred compensation agreements. During 2009, certain of these obligations were renegotiated by the Company with the purchase of annuity contracts. At December 31, 2016 and 2015, recorded obligations of $401,466 and $413,268, respectively, are included in other liabilities with respect to these agreements. The related life insurance policies are reported as assets at their cash surrender values of $2,197,348 and $2,139,657 at December 31, 2016 and 2015, respectively. Total expense under these plans was approximately $4,700 and $6,600 for the years ended December 31, 2016 and 2015, respectively.

 

11. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss included in stockholders’ equity are as follows:

 

   December 31, 
   2016   2015 
         
Unrealized net loss on pension plan  $(1,569,348)  $(1,609,735)
Unrealized loss on securities available for sale   (772,676)   (238,017)
           
Accumulated other comprehensive loss before taxes   (2,342,024)   (1,847,752)
           
Tax effect   796,288    733,482 
           
Accumulated other comprehensive loss  $(1,545,736)  $(1,114,270)

 

12. COMMITMENTS AND CONTINGENCIES

 

Off-Balance Sheet Financial Instruments

 

The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments are limited to agreements to extend credit that involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of the Association’s involvement in particular classes of financial instruments. The Company’s maximum exposure to credit loss in the event of nonperformance by the other parties to these instruments represents the contract amounts, assuming that they are fully funded at a later date and any collateral proves to be worthless.

 

The Company had loan origination commitments of $1.6 million and $6.9 million at December 31, 2016 and 2015, respectively. Of the commitments at December 31, 2016, loan commitments totaling $1.1 million were fixed rate at

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

12. COMMITMENTS AND CONTINGENCIES (Cont’d)

 

rates ranging from 4.85% to 6.13% and $500,000 of commitments were variable at the prime rate plus an index of 2.75%. In addition, the Company has outstanding undisbursed home equity and other lines of credit totaling $1.0 million and $1.3 million at December 31, 2016 and 2015, respectively. These are contractual agreements to lend to customers within specified time periods at interest rates and on other terms based on existing market conditions.

 

Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. The commitment amounts do not necessarily represent future cash requirements since certain agreements may expire without being funded. The credit risk associated with these instruments is essentially the same as for outstanding loans reported in the balance sheets. Commitments are subject to the same credit approval process, including a case-by-case evaluation of the customer’s creditworthiness and related collateral requirements.

 

At December 31, 2016 and 2015, the Company had a $2.0 million unsecured line of credit with Atlantic Central Bankers Bank which has no balance outstanding for the aforementioned periods.

 

Legal Proceedings

 

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. At December 31, 2016, the Company is not involved in any legal proceedings, the outcome of which would be material to the financial statements.

 

13. REGULATORY CAPITAL

 

The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators, that if undertaken could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations. As of December 31, 2016 and 2015 the Association exceeded all capital adequacy requirements to which it was subject (see tables below). There were no conditions or events since December 31, 2016 that management believes have changed the Association’s capital ratings.

 

On January 1, 2015, the final rules implementing the Basel Committee on Banking Supervision capital guidelines for banking organizations (Basel III) regulatory capital framework and related Dodd-Frank Act changes became effective for the Association. These rules supersede the federal banking agencies' general risk-based capital rules (Basel I). Full compliance with all of the final rule's requirements is phased in over a multi-year transition period ending on January 1, 2019. Basel III revised minimum capital requirements and adjusted prompt corrective action thresholds. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Association. The rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0 percent to 6.0 percent, required a minimum ratio of total capital to risk-weighted assets of 8.0 percent, and required a minimum leverage ratio of 4.0

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

13. REGULATORY CAPITAL (Cont’d)

 

percent. A new capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This conservation buffer will be phased in beginning January 1, 2016 at 0.625 percent of risk-weighted assets and increase each subsequent year by an additional 0.625 percent until reaching its final level of 2.5 percent of risk-weighted assets on January 1, 2019. The final rule also revised the definition and calculation of Tier 1 capital, total capital and risk-weighted assets.

 

The following table presents the Association’s actual capital positions and ratios under risk-based capital guidelines of Basel III and Basel I at December 31, 2016 and 2015, respectively:

 

               To be Well 
               Capitalized Under 
           Minimum Capital   Prompt Corrective 
   Actual   Requirements   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
           (Dollars in Thousands)         
                         
December 31, 2016                              
                               
Tangible Capital   11,679    12.84%   1,364    1.500%   N/A    - 
Total Risked-based Capital   12,146    26.87%   3,899    8.625%   4,521    10.00%
Common Equity Tier 1 Capital   11,679    25.84%   2,317    5.125%   2,938    6.50%
Tier 1 Risk-based Capital   11,679    25.84%   2,995    6.625%   3,616    8.00%
Tier 1 Leverage Capital   11,679    12.84%   3,637    4.000%   4,547    5.00%
                               
December 31, 2015                              
                               
Tangible Capital   11,738    12.92%   1,362    1.50%   $    N/A    - 
Total Risked-based Capital   12,201    30.41%   3,210    8.00%   4,012    10.00%
Common Equity Tier 1 Capital   11,738    29.25%   1,805    4.50%   2,608    6.50%
Tier 1 Risk-based Capital   11,738    29.25%   2,407    6.00%   3,210    8.00%
Tier 1 Leverage Capital   11,738    12.92%   3,634    4.00%   4,542    5.00%

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

14. FAIR VALUE MEASUREMENTS AND DISCLOSURES

 

A. Fair Value Measurements

 

The Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. ASC Topic 820 was issued to increase consistency and comparability in reporting fair values.

 

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company did not have any liabilities that were measured at fair value at December 31, 2016 and 2015. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as foreclosed real estate owned and certain impaired loans. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

 

In accordance with ASC Topic 820, the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

 

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

The Company bases its fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ASC Topic 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Assets that are measured on a recurring basis are limited to the available-for-sale securities portfolio. The available-for-sale portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Substantially all of the available-for-sale portfolio consists of investment securities issued by government-sponsored enterprises. The fair values for substantially all of these securities are obtained from an independent securities broker. Based on the nature of the securities, the securities broker provides the Company with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in the portfolio.

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

14. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)

 

A. Fair Value Measurements (Cont’d)

 

The following table provides the level of valuation assumptions used to determine the carrying value of assets measured at fair value on a recurring basis at December 31, 2016 and 2015:

 

       Fair Value Measurements at December 31, 
       Quoted Prices in Active   Significant Other   Significant 
   Carrying   Markets for Identical   Observable Inputs   Unobservable Inputs 
Description  Value   (Level 1)   (Level 2)   (Level 3) 
                 
December 31, 2016:                    
Securities available for sale  $29,331,278   $-   $29,331,278   $- 
                     
December 31, 2015:                    
Securities available for sale  $30,750,302   $-   $30,750,302   $- 

 

There were no assets measured at fair value on a non-recurring basis at December 31, 2016 and 2015.

 

B. Fair Value Disclosures

 

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein.

 

Cash and Cash Equivalents

 

For cash and due from banks and federal funds sold, the carrying amount approximates the fair value (Level 1).

 

Securities

 

The fair value of securities is estimated based on bid quotations received from securities dealers, if available (Level 1). If a quoted market price was not available, fair value was estimated using quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued (Level 2).

 

FHLB and other stock, at cost

 

The fair value for FHLB and other stock, at cost is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock, and the Company is required to maintain a minimum balance based upon the unpaid principal of home mortgage loans (Level 2).

 

Loans Receivable

 

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, commercial, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories (Level 3).

 

 F-40 

Table of Contents

 

SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

14. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)

 

B. Fair Value Disclosures (Cont’d)

 

Deposits

 

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and NOW and money market accounts, is equal to the amount payable on demand (Level 1). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits with similar remaining maturities (Level 2).

 

Short-Term Borrowings

 

The carrying amounts of federal funds purchased, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 1).

 

Long-Term Borrowings

 

The fair value of long-term borrowings is estimated using discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements (Level 2).

 

Off-Balance-Sheet Instruments

 

In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. Their fair value would approximate fees currently charged to enter into similar agreements. For further information on these financial instruments, see Note 12.

 

The carrying values and estimated fair values of financial instruments are as follows (in thousands):

 

   December 31, 
   2016   2015 
   Carrying   Estimated   Carrying   Estimated 
   Value   Fair Value   Value   Fair Value 
       (In Thousands)     
Financial assets:                    
Cash and cash equivalents  $2,923   $2,923   $3,327   $3,327 
Securities held to maturity   3,955    4,011    4,736    4,859 
Securities available for sale   29,331    29,331    30,750    30,750 
Loans receivable   48,045    48,488    47,092    47,543 
FHLB and other stock, at cost   335    335    204    204 
Accrued interest receivable   443    443    332    332 
                     
Financial liabilities:                    
Deposits   74,288    74,308    78,110    78,266 
Advances from FHLB of N.Y.   3,000    3,001    -    - 

 

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SUNNYSIDE BANCORP, INC. AND SUSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

14. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)

 

The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all or substantially all of the financial instruments were offered for sale.

 

In addition, the fair value estimates were based on existing on-and-off balance sheet financial instruments without attempting to value the anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses have a significant effect on fair value estimates and have not been considered in any of the estimates.

 

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. The lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

 

 F-42 

  

Signatures

 

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Sunnyside Bancorp
     
Date: March 30, 2017 By: /s/ Timothy D. Sullivan
    Timothy D. Sullivan
    President and Chief Executive Officer
    (Duly Authorized Representative)

 

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures   Title   Date
         
/s/ Timothy D. Sullivan   President, Chief Executive Officer and Director   March 30, 2017
Timothy D. Sullivan   (Principal Executive Officer)    
         
/s/ Edward J. Lipkus   Vice President, Chief Financial Officer and Treasurer   March 30, 2017
Edward J. Lipkus   (Principal Financial and Accounting Officer)    
         
/s/ Gerardina Mirtuono   Senior Vice President, Chief Operating Officer and   March 30, 2017
Gerardina Mirtuono   Director    
         
/s/ William Boeckelman   Director   March 30, 2017
William Boeckelman        
         
/s/ Lawrence P. Doyle   Director   March 30, 2017
Lawrence P. Doyle        
         
/s/ Deborah J. Elliot   Director   March 30, 2017
Deborah J. Elliot        
         
/s/ Desmond Lyons   Director   March 30, 2017
Desmond Lyons        
         
/s/ Walter G. Montgomery   Director   March 30, 2017
Walter G. Montgomery