Attached files
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EX-33 - Sunnyside Bancorp, Inc. | ex-32.htm |
EX-31.2 - Sunnyside Bancorp, Inc. | ex31-2.htm |
EX-31.1 - Sunnyside Bancorp, Inc. | ex31-1.htm |
EX-23 - Sunnyside Bancorp, Inc. | ex23.htm |
EX-21 - Sunnyside Bancorp, Inc. | ex21.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal ended December 31, 2017.
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 |
(I.R.S.
Employer |
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 |
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 $9,365,909 at June 30, 2017.
As of March 26, 2018, 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 2018 Annual Meeting of Shareholders.
TABLE OF CONTENTS
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PART I
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, 2017, Sunnyside Bancorp had consolidated assets of $85.0 million, liabilities of $73.7 million and equity of $11.3 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, 2017, $22.3 million, or 45.6%, of our total loan portfolio was comprised of owner-occupied, one- to four-family residential real estate loans, $14.6 million, or 29.9%, was comprised of commercial real estate and multi-family mortgage loans and $12.0 million, or 24.5%, 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. There were no advances outstanding at December 31, 2017.
For the year ended December 31, 2017, the Company’s pre-tax income increased $124,000 to $85,000 compared to a pre-tax loss of $39,000 in 2016. Net interest income increased $27,000, while non-interest expense decreased by $208,000, partly offset by a decrease of $75,000 in non-interest income and a $37,000 increase in the provision for loan losses.
As a result of the new Federal Tax Act that was enacted in December 2017, the Company remeasured and adjusted its deferred tax balances requiring a deferred tax expense charge of $422,910 which significantly contributed to our net loss of $327,000 for 2017. Similarly, in 2016, we were negatively impacted by a change in the New York State tax law which resulted in the Company recording a valuation allowance against its New York State deferred tax asset of $172,000 and reporting a net loss of $117,000 for the year ended December 31, 2016.
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, 2017, $22.3 million, or 45.6%, 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 2012 through 2016 are provided below:
● | The homeownership rate in Westchester County was 61.4%, compared to 53.6% in the State of New York; | |
● | The median home value was $507,300, compared to $286,300 in the State of New York; | |
● | The median household income in Westchester County was $86,226, compared to $60,741 in the State of New York; | |
● | Approximately 47.3% of the population of Westchester County held a bachelor’s degree or higher, compared to 34.7% in the State of New York; and | |
● | Approximately 10.0% of the population of Westchester County had incomes below poverty level, compared to 14.7% in the State of New York. |
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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 2012 through 2016:
● | 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 $354,800 and $420,700, respectively, compared to $286,300 in the State of New York; | |
● | The median household income in Putnam County and Rockland County was $97,606 and $86,134, respectively, compared to $60,741in the State of New York; | |
● | Approximately 38.9% and 40.4% of the population of Putnam County and Rockland County, respectively, held a bachelor’s degree or higher, compared to 34.7% in the State of New York; and | |
● | Approximately 6.0% and 14.4% of the population of Putnam County and Rockland County, respectively, had incomes below poverty level, compared to 14.7% 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, 2017 (the latest date for which information is available), our market share was 0.07% of total FDIC-insured deposits in Westchester, making us the 29th largest out of 33 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; | |
● | 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; and | |
● | 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, 2017, $22.3 million, or 45.6%, 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, 2017, $14.6 million, or 29.9% 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, 2017, $12.0 million, or 24.5% 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, 2017 purchased loans accounted for $13.1 million of our total loan portfolio. We will opportunistically seek to purchase whole or participations in one- to four-family residential real estate loans and commercial and multi-family real estate 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, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One- to four-family residential | $ | 22,328 | 45.6 | % | $ | 24,809 | 51.3 | % | ||||||||
Commercial and multi-family residential | 14,636 | 29.9 | 15,791 | 32.6 | ||||||||||||
Home equity lines of credit | 433 | 0.9 | 524 | 1.1 | ||||||||||||
Student loans | 10,151 | 20.7 | 5,743 | 11.9 | ||||||||||||
Other loans | 1,424 | 2.9 | 1,505 | 3.1 | ||||||||||||
Total loans receivable | $ | 48,972 | 100.0 | % | $ | 48,372 | 100.0 | % | ||||||||
Less: | ||||||||||||||||
Deferred loan fees (costs and premiums) | (333 | ) | (140 | ) | ||||||||||||
Allowance for loan losses | 507 | 467 | ||||||||||||||
Total loans receivable, net | $ | 48,798 | $ | 48,045 |
Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2017. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2017. 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 | |||||||||||||||||||
Due During the Years Ending December 31, | ||||||||||||||||||||||||
2018 | $ | 340 | $ | 548,733 | $ | - | $ | - | $ | 55,695 | $ | 604,768 | ||||||||||||
2019 | 62,886 | - | - | - | 563,223 | $ | 626,109 | |||||||||||||||||
2020 | 151,969 | 446,451 | - | - | 5,188 | $ | 603,608 | |||||||||||||||||
2021 to 2022 | 43,018 | 2,201,568 | 15,564 | 1,317,859 | 200,523 | $ | 3,778,532 | |||||||||||||||||
2023 to 2027 | 3,480,465 | 8,542,849 | 270,976 | 5,442,055 | 514,570 | $ | 18,250,915 | |||||||||||||||||
2028 to 2032 | 5,562,458 | 1,518,276 | 146,653 | 33,807 | - | $ | 7,261,194 | |||||||||||||||||
2033 and beyond | 13,027,295 | 1,378,038 | - | 3,357,123 | 84,620 | $ | 17,847,076 | |||||||||||||||||
$ | 22,328,431 | $ | 14,635,915 | $ | 433,193 | $ | 10,150,844 | $ | 1,423,819 | $ | 48,972,202 |
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Fixed and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2017, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2018.
Due after December 31, 2018 | ||||||||||||
Fixed | Adjustable | Total | ||||||||||
(In thousands) | ||||||||||||
Real estate loans: | ||||||||||||
One- to four-family residential | $ | 18,401 | $ | 3,927 | $ | 22,328 | ||||||
Commercial and multi-family residential | 8,211 | 5,876 | $ | 14,087 | ||||||||
Home equity lines of credit | ― | 433 | 433 | |||||||||
Student Loans | 6,747 | 3,404 | 10,151 | |||||||||
Other loans | 849 | 519 | 1,368 | |||||||||
Total loans | $ | 34,208 | $ | 14,159 | $ | 48,367 |
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, 2017, $22.3 million, or 45.6% 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, 2017, 82.4% of our one- to four-family residential real estate loans were fixed-rate loans, and 17.6% 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, 2017 was generally $453,100 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.”
Virtually all 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 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.
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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, 2017, we had $14.6 million in commercial and multi-family real estate loans, representing 29.9% 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.
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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. 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 $1.8 million at December 31, 2017. 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, 2017, our average commercial real estate loan had a balance of $538,000. At that same date, our largest commercial real estate relationship totaled $1.6 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.
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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, 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, 2017, the average loan balance of our outstanding home equity lines of credit was $72,000, and the largest outstanding balance of any such loan was $178,000. This loan was performing in accordance with its repayment terms at December 31, 2017.
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 $3.4 million at December 31, 2017. 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 $6.7 million at December 31, 2017. At December 31, 2017, student loans totaled $10.2 million and represented 20.7% 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, 2017, other loans totaled $1.4 million, or 2.9% 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.
13 |
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, 2017, these types of purchased loans accounted for $13.1 million of our total loan portfolio. 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, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Total loans at beginning of year | $ | 48,372 | $ | 47,503 | ||||
Loans originated: | ||||||||
Real estate loans: | ||||||||
One- to four-family residential | ― | ― | ||||||
Commercial and multi-family | 2,543 | 4,369 | ||||||
Home equity lines of credit | 63 | 150 | ||||||
Total real estate loans | 2,606 | 4,519 | ||||||
Student loans | 191 | 1,337 | ||||||
Other | 1,638 | 1,393 | ||||||
Total loans originated | $ | 4,435 | $ | 7,249 | ||||
Loans Purchased: | ||||||||
One- to four-family residential | 1,413 | ― | ||||||
Commercial and multi-family | ― | ― | ||||||
Student loans | 5,713 | 3,226 | ||||||
Total Loans Purchased | 7,126 | 3,226 | ||||||
Loans Sold: | ||||||||
Commercial and multi-family | ― | 843 | ||||||
Other | 835 | 547 | ||||||
Total Loans Sold | 835 | 1,390 | ||||||
Deduct: | ||||||||
Principal repayments | 10,126 | 8,216 | ||||||
Net loan activity | 600 | 869 | ||||||
Total loans at end of year | $ | 48,972 | $ | 48,372 |
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, 2017, our largest credit relationship totaled $1.6 million and was secured by commercial real estate. At December 31, 2017, this relationship was performing in accordance with its repayment terms. Our second largest relationship at this date was a $1.4 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. 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.
14 |
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.
15 |
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, 2017 | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
One- to four-family residential | 1 | $ | 177 | 2 | $ | 336 | 3 | $ | 513 | |||||||||||||||
Commercial and multi-family residential | - | - | - | - | - | - | ||||||||||||||||||
Home equity lines of credit | - | - | - | - | - | - | ||||||||||||||||||
Commercial | - | - | - | - | - | - | ||||||||||||||||||
Student | 3 | 48 | 1 | 27 | 4 | 75 | ||||||||||||||||||
Other loans | ||||||||||||||||||||||||
Total | 4 | $ | 225 | 3 | $ | 363 | 7 | $ | 588 | |||||||||||||||
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 |
16 |
Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
At December 31, | ||||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Non-accrual loans: | ||||||||
Real estate loans: | ||||||||
One- to four-family residential | $ | 599 | $ | 609 | ||||
Commercial and multi-family | ― | ― | ||||||
Home equity lines of credit | 16 | 21 | ||||||
Student loans | ― | ― | ||||||
Other | ― | ― | ||||||
Total | $ | 615 | $ | 630 | ||||
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 | 27 | ― | ||||||
Other | ― | ― | ||||||
Total loans 90 days or more past due | 27 | ― | ||||||
Total non-performing loans | $ | 642 | $ | 630 | ||||
Real estate owned | ― | ― | ||||||
Other non-performing assets | ― | ― | ||||||
Total non-performing assets | $ | 642 | $ | 630 | ||||
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 | 1.31 | % | 1.30 | % | ||||
Total non-performing loans to total assets | 0.76 | % | 0.70 | % | ||||
Total non-performing assets to total assets | 0.76 | % | 0.70 | % |
For the year ended December 31, 2017, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $31,300. Interest income recognized on such loans for the year ended December 31, 2017 was $16,800.
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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 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, 2017 and 2016.
At December 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Classification of Assets: | ||||||||
Substandard | $ | 566 | $ | 581 | ||||
Doubtful | ― | ― | ||||||
Loss | — | — | ||||||
Total Classified Assets | $ | 566 | $ | 581 | ||||
Special Mention | $ | 49 | $ | — |
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, 2017, 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, 2017.
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 2017 and 2016, we recorded a provision of $40,000 and $4,000, respectively. The allowance for loan losses was $507,000, or 1.04% of total loans, at December 31, 2017, compared to $467,000, or 0.97% of total loans, at December 31, 2016. 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.
18 |
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, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Balance at beginning of year | $ | 467 | $ | 463 | ||||
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 | 40 | 4 | ||||||
Balance at end of year | $ | 507 | $ | 467 | ||||
Ratios: | ||||||||
Net charge-offs to average loans outstanding | ― | % | ― | % | ||||
Allowance for loan losses to non-performing loans at end of year | 79.0 | % | 74.1 | % | ||||
Allowance for loan losses to total loans at end of year | 1.04 | % | 0.97 | % |
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, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
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 | $ | 318 | 62.7 | % | 45.6 | % | $ | 297 | 63.6 | % | 51.3 | % | ||||||||||||
Commercial and multi-family residential | 121 | 23.9 | 29.9 | 138 | 29.6 | 32.6 | ||||||||||||||||||
Home equity lines of credit | 4 | 0.8 | 0.9 | 5 | 1.0 | 1.1 | ||||||||||||||||||
Student loans | 54 | 10.7 | 20.7 | 20 | 4.3 | 11.9 | ||||||||||||||||||
Other loans | 10 | 1.9 | 2.9 | 7 | 1.5 | 3.1 | ||||||||||||||||||
Total allowance for loan losses | $ | 507 | 100 | % | 100 | % | $ | 467 | 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, 2017, 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. Additionally, as a member of the Federal Home Loan Bank of New York (FHLB), we are required to purchase stock in the FHLB and at December 31, 2017, we owned $82,000 in FHLB stock. At December 31, 2017, 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.
20 |
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 Community Bankers Bank) at the dates indicated.
At December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
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 | ||||||||
Mortgage-backed securities | 108 | 112 | 1,405 | 1,457 | ||||||||||||
State, county and municipal securities | 549 | 560 | 550 | 542 | ||||||||||||
Total securities held to maturity | $ | 657 | $ | 672 | $ | 3,955 | $ | 4,011 | ||||||||
Securities available for sale: | ||||||||||||||||
Unites States government and agency securities | $ | 2,999 | $ | 2,978 | $ | 3,199 | $ | 3,192 | ||||||||
Mortgage-backed securities | 26,593 | 26,198 | 26,905 | 26,139 | ||||||||||||
Total securities available for sale | $ | 29,592 | $ | 29,176 | $ | 30,104 | $ | 29,331 |
21 |
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2017 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 | $ | - | - | % | $ | - | -% | $ | - | - | % | $ | - | - | % | $ | - | $ | - | - | % | |||||||||||||||||||||||
Mortgage-backed securities | $ | - | - | % | $ | - | -% | $ | - | - | % | $ | 108 | 2.3 | % | $ | 108 | $ | 112 | 2.30 | % | |||||||||||||||||||||||
State, county and municipal securities | $ | - | - | % | $ | 203 | 1.26 | % | $ | - | - | % | $ | 346 | 3.27 | % | $ | 549 | $ | 560 | 2.53 | % | ||||||||||||||||||||||
Total securities held to maturity | $ | - | - | % | $ | 203 | 1.26 | % | $ | - | - | % | $ | 454 | 3.04 | % | $ | 657 | $ | 672 | 2.49 | % | ||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||
US government and agency securities | $ | - | - | % | $ | 2,999 | 1.43 | % | $ | - | - | % | $ | - | - | % | $ | 2,999 | $ | 2,978 | 1.43 | % | ||||||||||||||||||||||
Mortgage-backed | $ | - | - | % | $ | 325 | 1.25 | % | $ | 3,427 | 1.66 | % | $ | 22,841 | 2.09 | % | $ | 26,593 | $ | 26,198 | 2.02 | % | ||||||||||||||||||||||
Total securities available for sale | $ | - | - | % | $ | -3,324 | 1.41 | % | $ | 3,427 | 1.66 | % | $ | 22,841 | 2.09 | % | $ | 29,592 | $ | 29,176 | 1.96 | % |
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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 $0 and $3.0 million in advances at December 31, 2017 and 2016, 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, 2017, $24.1 million, or 33.2% of our total deposit accounts were certificates of deposit, of which $17.4 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.
2017 | 2016 | |||||||||||||||||||||||
Average Balance | Percent | Weighted Average Rate | Average Balance | Percent | Weighted Average Rate | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Deposit Type | ||||||||||||||||||||||||
Non-interest-bearing checking | $ | 4,597 | 6.3 | % | - | % | $ | 4,343 | 5.6 | % | - | % | ||||||||||||
NOW | 11,556 | 15.7 | 0.05 | 12,095 | 15.6 | 0.05 | ||||||||||||||||||
Savings | 29,380 | 40.0 | 0.11 | 29,882 | 38.6 | 0.11 | ||||||||||||||||||
Money Market | 3,184 | 4.3 | 0.09 | 2,989 | 3.9 | 0.10 | ||||||||||||||||||
Certificates of Deposit | 24,735 | 33.7 | 0.75 | 28,068 | 36.3 | 0.95 | ||||||||||||||||||
Total Deposits | $ | 73,452 | 100.0 | % | 0.31 | % | $ | 77,377 | 100.0 | % | 0.40 | % |
23 |
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
At December 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Interest Rate: | ||||||||
Less than 2.00% | $ | 24,123 | $ | 22,203 | ||||
2.00% to 2.99% | - | 3,394 | ||||||
3.00% to 3.99% | - | - | ||||||
4.00% to 4.99% | - | - | ||||||
5.00% and above | - | - | ||||||
Total | $ | 24,123 | $ | 25,597 |
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, 2017 | ||||||||||||||||||||||||
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% | $ | 17,403 | $ | 4,124 | $ | 1,237 | $ | 1,359 | $ | 24,123 | 100 | % | ||||||||||||
2.00% to 2.99% | - | - | - | - | - | - | ||||||||||||||||||
3.00% to 3.99% | - | - | - | - | - | - | ||||||||||||||||||
4.00% to 4.99% | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 17,403 | $ | 4,124 | $ | 1,237 | $ | 1,359 | $ | 24,123 | 100 | % |
As of December 31, 2017, the aggregate amount of outstanding certificates of deposit at Sunnyside Federal in amounts greater than or equal to $100,000 was approximately $9.3 million. The following table presents the maturity of these certificates of deposit at such date.
Period to Maturity | At December 31, 2017 | |||
(In thousands) | ||||
Three months or less | $ | 2,845 | ||
Over three through six months | 1,383 | |||
Over six months through one year | 1,625 | |||
Over one year to three years | 3,404 | |||
Over three years | - | |||
Total | $ | 9,257 |
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:
24 |
At
or For the Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Balance at end of period | $ | - | $ | 3,000 | ||||
Average balance during period | 1,550 | 3,585 | ||||||
Maximum outstanding at any month end | 3,700 | 5,300 | ||||||
Interest rate at end of period | N/A | 0.81 | % | |||||
Average interest rate during period | 1.0 | % | 0.61 | % |
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, 2017, we had 14 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 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.
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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:
● | 5.75 percent CET1 to risk-weighted assets. |
● | 7.25 percent Tier 1 capital (i.e., CET1 plus Additional Tier 1) to risk-weighted assets. |
● | 9.25 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 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.
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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.
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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 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, 2017 under the “prompt corrective action” regulations in effect as of such date. We believe that, as of December 31, 2017, 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, 2017, 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, 2017, 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 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.
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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 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.
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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, 2017, the annualized FICO assessment was equal to 0.54 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, 2017, 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 | |
● | 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. |
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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 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.
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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 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 $1.07 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, 2017, we had no minimum tax credit carryforward.
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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 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, 2017, Sunnyside Federal had $1,672,000 of federal net operating loss carry-forwards and $2,828,000 of New York State net operating loss carry-forwards available for future use.
On December 22, 2017, the President signed into law the Tax Act. The new law reduces the federal corporate income tax rate from 34% to 21% for tax years beginning after December 31, 2017. Under ASC 740, “Income Taxes”, companies are required to recognize the effect of tax law changes in the period of enactment; therefore, the Company re-measured its deferred tax assets and liabilities at the enacted tax rate expected to apply when its temporary differences are expected to be realized or settled. As of the date of enactment, the resulting impact of the re-measurement of the Company’s deferred tax balances was $422,910.
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.
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) 0.125% 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. |
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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 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 entire New York deferred tax asset in the amount of $222,000. 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 $1.2 million at December 31, 2017.
ITEM 3. | Legal Proceedings |
At December 31, 2017, 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.
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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 March 21, 2018 was 83. 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.
The following table presents quarterly market information for Sunnyside Bancorp, Inc.’s common stock for the years ended December 31, 2017 and 2016:
2017 | High Sale | Low Sale | ||||||
Quarter ended December 31 | $ | 17.00 | $ | 15.50 | ||||
Quarter ended September 30 | $ | 15.50 | $ | 13.60 | ||||
Quarter ended June 30 | $ | 14.10 | $ | 13.20 | ||||
Quarter ended March 31 | $ | 14.20 | $ | 12.76 |
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 |
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. |
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(e) Stock Repurchases. Not applicable.
(f) Stock Performance Graph. Not required for smaller reporting companies.
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, 2017 and December 31, 2016 and our results of operations for the years ended December 31, 2017 and 2016. 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, 2017, $22.3 million or 45.6% of our total loan portfolio was comprised of owner-occupied, one-to four family residential real estate loans; $14.6 million or 29.9% was comprised of commercial and multi-family real estate loans and $10.2 million or 20.7% was comprised of student loans.
As a result of our conservative underwriting and credit monitoring processes, we had $642,000 in non-performing assets at December 31, 2017 and $630,000 at December 31, 2016. There were $588,000 of delinquent loans at December 31, 2017 compared to $645,000 of delinquent loans at December 31, 2016.
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 $0 and $3 million in advances at December 31, 2017 and 2016, 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 commercial and multi-family real estate lending, student loan financing and commercial lending, including Small Business Administration (SBA) lending.
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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 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.
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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, 2017, 98.2% of our securities were issued by U.S. government agencies or U.S. government-sponsored enterprises.
Comparison of Financial Condition at December 31, 2017 and December 31, 2016
Total assets decreased $5.3 million, or 5.9%, to $85.0 million at December 31, 2017 from $90.3 million at December 31, 2016. The decrease was primarily the result of a decrease in investment securities and cash and cash equivalents, partly offset by an increase in net loans.
Securities available for sale decreased $156,000, or 0.5%, to $29.2 million at December 31, 2017 from $29.3 million at December 31, 2016 while securities held to maturity decreased $3.3 million, or 83.4%, to $657,000 at December 31, 2017 from $4.0 million at December 31, 2016. The decrease in securities during 2017 was primarily a result of calls and selling off odd lot mortgage-backed securities.
Net loans receivable increased $753,000, or 1.6%, to $48.8 million at December 31, 2017 from $48.0 million at December 31, 2016. The increase in loans receivable during 2017 was primarily due to an increase of $4.4 million, or 76.7% increase in student loans partly offset by a $2.5 million decrease in the one-to four- family residential loan portfolio and a $1.2 million decrease in commercial real estate and multi-family loans.
Cash and cash equivalents decreased $1.7 million, or 58.0%, to $1.3 million at December 31, 2017 from $2.9 million at December 31, 2016. The decrease resulted primarily from reducing FHLB advances, funding loan growth and allowing higher yielding certificates of deposit to run-off.
Principal payments, calls and sales reduced the securities available for sale and held to maturity portfolios by $156,000, or 0.5% and $3.3 million, or 83.4%, respectively.
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At December 31, 2017, our investment in bank-owned life insurance was $2.3 million, an increase of $61,000, from $2.2 million at December 31, 2016. 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 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 decreased $588,000, or 46.3%, to $682,000 at December 31, 2017 from $1.3 million at December 31, 2016. The decrease resulted primarily from the reduction in Federal income tax rates from 34% to 21% due to the new tax law implemented in December 2017, as well as a reduction in unrealized losses on securities.
Other assets, consisting primarily of prepaid insurance premiums, prepaid expenses and an annuity contract for a former director, decreased $183,000, or 42.4%, to $248,000 at December 31, 2017 from $431,000 at December 31, 2016 primarily due to the pay-out of the aforementioned annuity and a decrease in prepaid assets and receivables.
Total deposits decreased $1.7 million, or 2.3%, to $72.6 million at December 31, 2017 from $74.3 million at December 31, 2016. The decrease was primarily due to lower certificates of deposit and savings balances partly offset by increases in money market and non-interest bearing balances. Certificates of deposits decreased $1.5 million, or 5.8% primarily due to the Company allowing higher rate deposits to run-off. Savings deposits decreased $1.1 million, or 3.8%. Money market balances increased $468,000 or 15.9%, while non-interest bearing checking increased $574,000 or 13.5%.
We had $0 in Federal Home Loan Bank advances outstanding at December 31, 2017 and $3.0 million at December 31, 2016. At December 31, 2017, we had the ability to borrow approximately $25.7 million from the Federal Home Loan Bank of New York, subject to our pledging sufficient assets. Additionally, at December 31, 2017, 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 increased $44,000, or 0.4%, to $11.3 million at December 31, 2017 compared to $11.2 million at December 31, 2016 primarily due to decreases in unrealized losses in our investment portfolio and our pension obligation both included in accumulated other comprehensive loss offset by our net loss for 2017.
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016
General.
For the year ended December 31, 2017, pre-tax income increased $124,000 to $85,000 compared to a pre-tax loss of $39,000 in 2016. Net interest income increased $27,000 while non-interest expenses decreased $208,000, partly offset by a decrease of $75,000 in non-interest income and a $37,000 increase in the provision for loan losses.
On December 22, 2017, the President signed into law the Tax Act. The new law reduces the federal corporate income tax rate from 34% to 21% for tax years beginning after December 31, 2017. Under ASC 740, “Income Taxes”, companies are required to recognize the effect of tax law changes in the period of enactment; therefore, the Company re-measured its deferred tax assets and liabilities at the enacted tax rate expected to apply when its temporary differences are expected to be realized or settled. As of the date of enactment, the resulting impact of the re-measurement of the Company’s deferred tax balances was $422,910. As a result, we had a net loss of $327,000 for 2017. In 2016, we were negatively impacted by a change in the New York State tax law which resulted in the Company recording a valuation allowance of $172,000 and reporting a net loss of $117,000 for the year ended December 31, 2016.
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.
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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 losses in 2018 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 $27,000, or 1.1%, to $2.5 million for the year ended December 31, 2017 from $2.5 million for the year ended December 31, 2016. The increase in net interest income was due to an $89,000 or 26.8% decrease in interest expense offset by a $62,000 or 2.2% decrease in interest income.
Interest income on loans increased $66,000, or 3.1%, primarily due to increases in the rate and balances on loans. Interest income on investment securities and mortgage-backed securities decreased $116,000 or 63.3% and $26,000 or 4.9%, respectively, primarily due to a decrease in average balances. Interest income on federal funds sold and other interest-earning assets increased $14,000, or 87.9% mainly due to higher dividends received. The average yield on our loans increased 8 basis points, and the average yield on our mortgage-backed securities increased 13 basis points while the average yield on investment securities decreased 116 basis points during 2017. Our net interest rate spread increased 25 basis points to 3.14% for the year ended December 31, 2017 from 2.89% for the year ended December 31, 2016, and our net interest margin increased 26 basis points to 3.19% for 2017 from 2.93% for 2016.
Interest and Dividend Income. Interest and dividend income decreased $62,000 to $2.8 million for the year ended December 31, 2017 from $2.8 million for the year ended December 31, 2016. Loan interest income increased $66,000 or 3.1%, interest on investment securities and mortgage backed securities decreased $142,000 or 20.0% and interest on federal funds sold and other earning assets increased $14,000 or 87.9% compared to 2016.
Interest income on loans increased $66,000, or 3.1%, to $2.2 million for the year ended December 31, 2017 from $2.1 million for the year ended December 31, 2016. The increase resulted primarily from an increase in average loan balances of $604,000 in 2017 to $48.7 million from $48.1 million in 2016 and an 8 basis point increase in the yield to 4.47% in 2017 from 4.39% for 2016.
Interest income on mortgage-backed securities decreased $26,000 to $503,000 primarily due to a decrease in the average balance of $3.3 million partly offset by a 13 basis point increase in yield from 1.77% in 2016 to 1.90% in 2017. Interest and dividend income of federal funds sold and other earning assets increased $14,000 to $31,000 mainly due to a 484 basis point increase in yield from 1.27% in 2016 to 6.11% in 2017. These increases were partly offset by a $116,000 decrease in interest income from investment securities primarily due to a $2.5 million decrease in average balances for the year ended December 31, 2017.
Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and borrowings, decreased $89,000 to $243,000 for the year ended December 31, 2017 from $333,000 for the year ended December 31, 2016. The cost of interest-bearing deposits and borrowings decreased 8 basis points to 0.35% for 2017 compared to 0.43% for 2016, reflecting a change in the mix of deposits and borrowings as well as our decision to let higher rate certificates of deposit to run-off.
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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 $40,000 for the year ended December 31, 2017 compared to $4,000 for the year ended December 31, 2016. The increase was mainly due to higher provisions for the residential and student loan portfolios in 2017 compared to 2016. The allowance for loan losses was $507,000 at December 31, 2017 compared to $467,000 at December 31, 2016. We had $642,000 in non-performing loans at December 31, 2017 and $630,000 at December 31, 2016. During the years ended December 31, 2017 and 2016 we had no loan charge-offs or recoveries.
Noninterest Income. Noninterest income decreased $75,000, or 22.3% to $260,000 for the year ended December 31, 2017 from $335,000 for the year ended December 31, 2016. The decrease was primarily due to a $92,000 decrease in gains on the sale of securities in 2017 partly offset by a $21,000 increase in gains on the sale of loans.
Noninterest Expense. Noninterest expense decreased $208,000, or 7.2%, to $2.7 million for the year ended December 31, 2017 from $2.9 million for the year ended December 31, 2016. Compensation and benefits decreased $62,000, or 4.2%, to $1.4 million for 2017 from $1.5 million for 2016, primarily due to lower health care and defined benefit plan expenses partly offset by higher ESOP expenses. Occupancy and equipment expense decreased $60,000, or 16.9%, primarily due to lower repairs, taxes and depreciation. Data processing fees increased $12,000, or 4.3%, primarily due to higher costs related to the Bank’s core processing. Professional fees decreased $25,000, or 5.9%, primarily due to lower legal fees. Other expense decreased $49,000, or 19.2%, primarily due to costs related to the development of the bank’s SBA program incurred in 2016, not in 2017, as well as lower stationery, printing and supplies expense and a reduction in insurance premiums. FDIC insurance premiums decreased $22,000 or 47.4%. The FDIC changed their assessment methodology which resulted in a decrease in costs due to the Bank’s lower risk profile.
Income Tax Expense. We recorded income tax expense of $412,000 for the year ended December 31, 2017 based on income before taxes of $85,000 and deferred tax expense of $423,000 as a result of the enactment of the “Tax Cuts and Jobs Act of 2017” which lowered the corporate income tax rate for the Company from 34% to 21%. In 2016, we recorded an income tax expense of $78,000 mainly due to the recording of a 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.
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, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average Balance | Interest | Yield/ | Average Balance | Interest | Yield/ | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 48,677 | $ | 2,175 | 4.47 | % | $ | 48,073 | $ | 2,109 | 4.39 | % | ||||||||||||
Investment securities | 3,822 | 67 | 1.75 | % | 6,322 | 184 | 2.91 | % | ||||||||||||||||
Mortgage-backed securities | 26,509 | 503 | 1.90 | % | 29,831 | 529 | 1.77 | % | ||||||||||||||||
Fed funds sold and other interest-earning assets | 507 | 31 | 6.11 | % | 1,257 | 16 | 1.27 | % | ||||||||||||||||
Total interest-earning assets | 79,515 | 2,776 | 3.49 | % | 85,483 | 2,838 | 3.32 | % | ||||||||||||||||
Non-interest-earning assets | 8,448 | 9,011 | ||||||||||||||||||||||
Total assets | $ | 87,963 | $ | 94,494 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Transaction accounts | $ | 11,556 | 6 | 0.05 | % | $ | 12,095 | 6 | 0.05 | % | ||||||||||||||
Regular savings | 29,380 | 33 | 0.11 | % | 29,882 | 34 | 0.11 | % | ||||||||||||||||
Money market | 3,184 | 3 | 0.09 | % | 2,989 | 3 | 0.10 | % | ||||||||||||||||
Certificates of deposit | 24,735 | 186 | 0.75 | % | 28,068 | 268 | 0.95 | % | ||||||||||||||||
Advances from FHLB of N.Y. | 1,550 | 16 | 1.00 | % | 3,585 | 22 | 0.61 | % | ||||||||||||||||
Total
interest-bearing liabilities | 70,405 | 244 | 0.35 | % | 76,619 | 333 | 0.43 | % | ||||||||||||||||
Noninterest-bearing liabilities | 5,946 | 5,778 | ||||||||||||||||||||||
Total liabilities | 76,351 | 82,397 | ||||||||||||||||||||||
Equity | 11,612 | 12,097 | ||||||||||||||||||||||
Total liabilities and equity | $ | 87,963 | $ | 94,494 | ||||||||||||||||||||
Net interest income | $ | 2,532 | $ | 2,505 | ||||||||||||||||||||
Interest rate spread (1) | 3.14 | % | 2.89 | % | ||||||||||||||||||||
Net interest-earning assets (2) | $ | 9,110 | $ | 8,864 | ||||||||||||||||||||
Net interest margin (3) | 3.19 | % | 2.93 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.94 | % | 111.57 | % |
(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 |
47 |
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, 2017 vs. 2016 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume | Rate | Total Increase (Decrease) | ||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 27 | $ | 39 | $ | 66 | ||||||
Investment securities | (59 | ) | (58 | ) | (117 | ) | ||||||
Mortgage-backed securities | (63 | ) | 37 | (26 | ) | |||||||
Fed funds sold and other interest-earning assets | (15 | ) | 30 | 15 | ||||||||
Total interest income | (110 | ) | 48 | (62 | ) | |||||||
Interest-bearing liabilities: | ||||||||||||
NOW accounts | 0 | 0 | 0 | |||||||||
Regular savings | (1 | ) | 0 | (1 | ) | |||||||
Money market | 0 | 0 | 0 | |||||||||
Certificates of deposit | (30 | ) | (52 | ) | (82 | ) | ||||||
Other borrowings | (16 | ) | 10 | (6 | ) | |||||||
Total interest expense | (47 | ) | (42 | ) | (89 | ) | ||||||
Increase(decrease) in net interest income | $ | (63 | ) | $ | 90 | $ | 27 |
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 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.
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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, 2017 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 | $ | 1,934 | (19.23 | )% | ||||
+300 | $ | 2,128 | (11.16 | )% | ||||
+200 | $ | 2,279 | (4.84 | )% | ||||
+100 | $ | 2,375 | (0.82 | )% | ||||
Level | $ | 2,395 | — | |||||
-100 | $ | 2,343 | (2.18 | )% |
(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 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.
49 |
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, 2017, we had the capacity to borrow approximately $25.7 million from the Federal Home Loan Bank of New York, subject to our pledging sufficient assets. Additionally, at December 31, 2017, 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, 2017 and 2016, we had $0 and $3.0 million 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, 2017, loan originations and purchases totaled $4.4 million and $7.1 million, respectively, compared to originations and purchases of $7.2 million and $3.2 million, respectively, for the year ended December 31, 2016. Purchases of investment and mortgage-backed securities totaled $12.6 million for the year ended December 31, 2017 and $23.5 million for the year ended December 31, 2016.
Total deposits decreased $1.7 million during the year ended December 31, 2017, while total deposits decreased $3.8 million during the year ended December 31, 2016. Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors. At December 31, 2017, certificates of deposit scheduled to mature within one year totaled $17.4 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 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.
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At December 31, 2017 and 2016, our capital ratios were all above the minimum levels required for it to be considered a “well capitalized” financial institution at December 31, 2017 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, 2017. Our Tier 1 and total risked-based capital was $11.7 million and $12.3 million, respectively, or 24.8% and 25.9% of total risk weighted assets at December 31, 2017. At 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 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 February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. This update was issued to address a narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). ASU 2018-02 permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 34 percent and the newly enacted 21 percent corporate income tax rate. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted, including adoption in any interim period, for (i) public business entities for reporting periods for which financial statements have not yet been issued and (ii) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The changes are required to be applied retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. The Company early adopted ASU 2018-02, which resulted in the reclassification from accumulated other comprehensive income to retained earnings totaling $242,060, reflected in the Consolidated Statements of Stockholders’ Equity.
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In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”. This update provides guidance about changes to terms or conditions of a share-based payment award which would require modification accounting. In particular, an entity is required to account for the effects of a modification if the fair value, vesting condition or the equity/liability classification of the modified award is not the same immediately before and after a change to the terms and conditions of the award. The update is to be applied prospectively for awards modified on or after the adoption date. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. The amendments in this update require the premium on callable debt securities to be amortized to the earliest call date rather than the maturity date; however, securities held at a discount continue to be amortized to maturity. The amendments apply only to debt securities purchased at a premium that are callable at fixed prices and on preset dates. The amendments more closely align interest income recorded on debt securities held at a premium or discount with the economics of the underlying instrument. ASU No. 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance on January 1, 2019 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that companies disaggregate the service cost component from other components of net benefit cost. This update calls for companies that offer postretirement benefits to present the service cost, which is the amount an employer has to set aside each quarter or fiscal year to cover the benefits, in the same line item with other current employee compensation costs. Other components of net benefit cost will be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
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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, 2017. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of the amended guidance including the potential impact on its Consolidated Financial Statements. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, any impact to the allowance for credit losses - currently allowance for loan and lease losses - will have an offsetting impact on retained earnings.
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 did not have a material impact on the Company’s consolidated financial statements.
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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 Company’s consolidated financial statements.
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 Company’s consolidated financial statements.
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 did not have a material impact on the Company’s consolidated financial statements.
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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
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, 2017. 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.
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During the quarter ended December 31, 2017, 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, 2017, 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, 2017 is effective.
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.
None.
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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, 2018 (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 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.
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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, 2017 and 2016; | |
(C) | Consolidated Statements of Operations for the years ended December 31, 2017 and 2016; | |
(D) | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017 and 2016; | |
(E) | Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017 and 2016; | |
(F) | Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016; 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
58 |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following financial statements for the year ended December 31, 2017, 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 filed on August 11, 2014. | |
**** | Incorporated by reference to the Current Report on Form 8-K filed on July 30, 2015. | |
***** | Incorporated by reference to the Company’s proxy statement filed on August 11, 2014. | |
****** |
Incorporated by reference to the Current Report on Form 8-K filed on March 23, 2018. |
None.
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INDEX TO FINANCIAL STATEMENTS OF
SUNNYSIDE BANCORP
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REPORT OF Independent Registered Public Accounting Firm
To the Board of Directors
Sunnyside Bancorp, Inc. and Subsidiary
Irvington, New York
Opinion on the Consolidated Financial Statements
I have audited the accompanying consolidated statements of financial condition of Sunnyside Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the “consolidated financial statements”). In my opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these consolidated financial statements based on my audits. Fontanella Associates LLC is a public accounting firm registered with the PCAOB and is required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
I conducted my audits in accordance with the standards of the PCAOB. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. My audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. My audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. I believe that my audits provide a reasonable basis for my opinion.
Alfred Fontanella | |
Fontanella Associates LLC |
Fontanella Associates LLC has served as the Company’s auditor since 2016. The engagement partner and audit manager have served on the audit team since 2009 originally under the firm name of Fontanella & Babitts, Certified Public Accountants.
March 27, 2018
142 Totowa Road, Suite 105 ▪ Totowa Boro, NJ 07512 ▪ 973.595.5300 phone ▪ 973.595.5890 fax
F-1 |
SUNNYSIDE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 1,229,036 | $ | 2,923,442 | ||||
Securities held to maturity, net; approximate fair value of $672,000 (2017) and $4,011,000 (2016) | 656,838 | 3,954,549 | ||||||
Securities available for sale | 29,175,525 | 29,331,278 | ||||||
Loans receivable, net | 48,798,072 | 48,045,062 | ||||||
Premises and equipment, net | 1,229,457 | 1,335,654 | ||||||
Federal Home Loan Bank of New York and other stock, at cost | 166,800 | 335,020 | ||||||
Accrued interest receivable | 490,239 | 443,062 | ||||||
Cash surrender value of life insurance | 2,258,324 | 2,197,348 | ||||||
Deferred income taxes | 682,438 | 1,270,575 | ||||||
Other assets | 248,268 | 431,156 | ||||||
Total assets | $ | 84,934,997 | $ | 90,267,146 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities: | ||||||||
Deposits | $ | 72,558,814 | $ | 74,287,596 | ||||
Advances from Federal Home Loan Bank of New York | - | 3,000,000 | ||||||
Advances from borrowers for taxes and insurance | 482,024 | 684,468 | ||||||
Other liabilities | 618,646 | 1,063,489 | ||||||
Total liabilities | 73,659,484 | 79,035,553 | ||||||
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 | 7,030,530 | 6,998,363 | ||||||
Unallocated common stock held by the Employee Stock Ownership Plan | (444,394 | ) | (466,606 | ) | ||||
Retained earnings | 6,152,648 | 6,237,637 | ||||||
Accumulated other comprehensive (loss) | (1,471,206 | ) | (1,545,736 | ) | ||||
Total stockholders’ equity | 11,275,513 | 11,231,593 | ||||||
Total liabilities and stockholders’ equity | $ | 84,934,997 | $ | 90,267,146 |
See accompanying notes to consolidated financial statements.
F-2 |
SUNNYSIDE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Interest and dividend income: | ||||||||
Loans | $ | 2,174,922 | $ | 2,109,169 | ||||
Investment securities | 67,363 | 183,531 | ||||||
Mortgage-backed securities | 502,741 | 528,715 | ||||||
Federal funds sold and other earning assets | 30,636 | 16,301 | ||||||
Total interest and dividend income | 2,775,662 | 2,837,716 | ||||||
Interest expense: | ||||||||
Deposits | 228,021 | 311,267 | ||||||
Borrowings | 15,465 | 21,564 | ||||||
Total interest expense | 243,486 | 332,831 | ||||||
Net interest income | 2,532,176 | 2,504,885 | ||||||
Provision for loan losses | 40,342 | 3,650 | ||||||
Net interest income after provision for loan losses | 2,491,834 | 2,501,235 | ||||||
Non-interest income: | ||||||||
Fees and service charges | 104,620 | 111,128 | ||||||
Net gain on sale of securities | 34,373 | 126,398 | ||||||
Net gain on sale of loans | 60,157 | 39,584 | ||||||
Income on bank owned life insurance | 60,976 | 57,691 | ||||||
Total non-interest income | 260,126 | 334,801 | ||||||
Non-interest expense: | ||||||||
Compensation and benefits | 1,399,958 | 1,462,052 | ||||||
Occupancy and equipment, net | 295,567 | 355,711 | ||||||
Data processing service fees | 294,157 | 281,901 | ||||||
Professional fees | 397,867 | 422,887 | ||||||
Federal deposit insurance premiums | 24,586 | 46,783 | ||||||
Advertising and promotion | 50,433 | 52,438 | ||||||
Other | 204,677 | 253,195 | ||||||
Total non-interest expense | 2,667,245 | 2,874,967 | ||||||
Income (loss) before income taxes | 84,715 | (38,931 | ) | |||||
Income tax | 411,764 | 78,488 | ||||||
Net (loss) | $ | (327,049 | ) | $ | (117,419 | ) | ||
Basic and diluted loss per share | $ | (0.44 | ) | $ | (0.16 | ) | ||
Weighted average shares outstanding | ||||||||
basic and diluted | 748,046 | 745,823 |
See accompanying notes to consolidated financial statements.
F-3 |
SUNNYSIDE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net (loss) | $ | (327,049 | ) | $ | (117,419 | ) | ||
Other comprehensive income (loss), before tax: | ||||||||
Defined benefit pension plans: | ||||||||
Net gain (loss) arising during the period | 71,191 | (55,177 | ) | |||||
Amortization of loss included in net periodic plan cost | 51,878 | 95,564 | ||||||
Unrealized gains (losses) on securities available for sale: | ||||||||
Unrealized holding gains (losses) arising during the period | 356,669 | (412,768 | ) | |||||
Reclassification adjustment for gains included in operations | - | (121,891 | ) | |||||
Other comprehensive income (loss), before tax | 479,738 | (494,272 | ) | |||||
Income tax expense (benefit) related to items of other comprehensive income | 163,148 | (62,806 | ) | |||||
Other comprehensive income (loss), net of tax | 316,590 | (431,466 | ) | |||||
Comprehensive income (loss) | $ | (10,459 | ) | $ | (548,885 | ) |
See accompanying notes to consolidated financial statements.
F-4 |
SUNNYSIDE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Unallocated | ||||||||||||||||||||||||
Additional | Common Stock | Accumulated Other | ||||||||||||||||||||||
Common Stock | Paid-in Capital | Held by ESOP | Retained Earnings | Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||
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 | ||||||||||||||||
Net Loss | - | - | - | (327,049 | ) | - | (327,049 | ) | ||||||||||||||||
ESOP shares allocated or committed to be released | - | 10,117 | 30,723 | - | - | 40,840 | ||||||||||||||||||
Restricted stock awards earned | - | 22,050 | - | - | - | 22,050 | ||||||||||||||||||
Purchase of stock for ESOP | - | - | (8,511 | ) | - | - | (8,511 | ) | ||||||||||||||||
Reclassification adjustment for the income tax effects of the Tax Cuts and Jobs Act on items within accumulated other comprehensive income (loss) | - | - | - | 242,060 | (242,060 | ) | - | |||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 316,590 | 316,590 | ||||||||||||||||||
Balance at December 31, 2017 | $ | 7,935 | $ | 7,030,530 | $ | (444,394 | ) | $ | 6,152,648 | $ | (1,471,206 | ) | $ | 11,275,513 |
See accompanying notes to consolidated financial statements.
F-5 |
SUNNYSIDE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) | $ | (327,049 | ) | $ | (117,419 | ) | ||
Adjustments to reconcile net (loss) to net cash provided by operating activities: | ||||||||
Depreciation expense | 135,919 | 145,204 | ||||||
Amortization of premiums and accretion of discounts, net | 239,324 | 266,145 | ||||||
Amortization of deferred loan fees and costs, net | 67,626 | 5,579 | ||||||
Provision for loan losses | 40,342 | 3,650 | ||||||
Net gain on sales of securities | (34,373 | ) | (126,398 | ) | ||||
Net gain on sales of loans | (60,157 | ) | (39,584 | ) | ||||
Increase in accrued interest receivable | (47,177 | ) | (110,588 | ) | ||||
Increase in cash surrender value of life insurance | (60,976 | ) | (57,691 | ) | ||||
Deferred income taxes | 424,989 | 23,927 | ||||||
Net decrease (increase) in other assets | 182,888 | (108,598 | ) | |||||
Net (decrease) increase in other liabilities | (321,774 | ) | 94,327 | |||||
Amortization of stock compensation plans | 62,890 | 49,279 | ||||||
Net cash provided by operating activities | 302,472 | 27,833 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of securities available for sale | (12,619,769 | ) | (23,475,710 | ) | ||||
Repayments and maturities of securities held to maturity | 239,520 | 364,058 | ||||||
Repayments and maturities of securities available for sale | 12,894,208 | 5,512,414 | ||||||
Proceeds from sales/calls of securities held to maturity | 3,091,223 | 421,569 | ||||||
Proceeds from sales/calls of securities available for sale | - | 18,704,011 | ||||||
(Purchase) redemption of Federal Home Loan Bank and other stock | 168,220 | (130,900 | ) | |||||
Loans purchased | (7,126,027 | ) | (3,297,749 | ) | ||||
Proceeds from sales of loans | 942,866 | 1,461,175 | ||||||
Loan originations, net of principal repayments | 5,382,340 | 914,165 | ||||||
Purchases of bank premises and equipment | (29,722 | ) | (15,419 | ) | ||||
Net cash provided by investing activities | 2,942,859 | 457,614 | ||||||
Cash flows from financing activities: | ||||||||
Net decrease in deposits | (1,728,782 | ) | (3,822,163 | ) | ||||
Net (decrease) increase in short term borrowings | (3,000,000 | ) | 3,000,000 | |||||
Net (decrease) increase in advances from borrowers for taxes and insurance | (202,444 | ) | 55,823 | |||||
Purchase of stock for restricted stock awards | (8,511 | ) | (122,325 | ) | ||||
Net cash used in financing activities | (4,939,737 | ) | (888,665 | ) | ||||
Net decrease in cash and cash equivalents | (1,694,406 | ) | (403,218 | ) | ||||
Cash and cash equivalents at beginning of year | 2,923,442 | 3,326,660 | ||||||
Cash and cash equivalents at end of year | $ | 1,229,036 | $ | 2,923,442 | ||||
Supplemental Information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 244,646 | $ | 352,236 | ||||
Income taxes, net | $ | 12,000 | $ | 19,728 |
See accompanying notes to consolidated financial statements.
F-6 |
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, 2017 and 2016, 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-7 |
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.
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-8 |
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, 2017 and 2016. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the statement of operations. The amount of interest and penalties for the years ended December 31, 2017 and 2016 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 2013.
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.
F-9 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
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).
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.
F-10 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
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, 2017, through the date of this report, and has determined that there are no subsequent events that require disclosure under FASB guidance.
Recent Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. This update was issued to address a narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). ASU 2018-02 permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 34 percent and the newly enacted 21 percent corporate income tax rate. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted, including adoption in any interim period, for (i) public business entities for reporting periods for which financial statements have not yet been issued and (ii) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The changes are required to be applied retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. The Company early adopted ASU 2018-02, which resulted in the reclassification from accumulated other comprehensive income to retained earnings totaling $242,060, reflected in the Consolidated Statements of Stockholders’ Equity.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”. This update provides guidance about changes to terms or conditions of a share-based payment award which would require modification accounting. In particular, an entity is required to account for the effects of a modification if the fair value, vesting condition or the equity/liability classification of the modified award is not the same immediately before and after a change to the terms and conditions of the award. The update is to be applied prospectively for awards modified on or after the adoption date. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. The amendments in this update require the premium on callable debt securities to be amortized to the earliest call date rather than the maturity date; however, securities held at a discount continue to be amortized to maturity. The amendments apply only to debt securities purchased at a premium that are callable at fixed prices and on preset dates. The amendments more closely align interest income recorded on debt securities held at a premium or discount with the economics of the underlying instrument. ASU No. 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance on January 1, 2019 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that companies disaggregate the service cost component from other components of net benefit cost. This update calls for companies that offer postretirement benefits to present the service cost, which is the amount an employer has to set aside each quarter or fiscal year to cover the benefits, in the same line item with other current employee compensation costs. Other components of net benefit cost will be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
F-11 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Recent Accounting Pronouncements (Cont’d)
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, 2017. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of the amended guidance including the potential impact on its Consolidated Financial Statements. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, any impact to the allowance for credit losses - currently allowance for loan and lease losses - will have an offsetting impact on retained earnings.
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 did not have a material impact on the Company’s consolidated financial statements.
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 Company’s consolidated financial statements.
F-12 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Recent Accounting Pronouncements (Cont’d)
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 Company’s consolidated financial statements.
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 did not have a material impact on the Company’s consolidated financial statements.
Reclassification
Certain amounts for the year ended December 31, 2016 have been reclassified to conform to the current year’s presentation.
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 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.
F-13 |
3. SECURITIES
December 31, 2017 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities held to maturity: | ||||||||||||||||
State, county, and municipal obligations | $ | 549,011 | $ | 11,595 | $ | 1,036 | $ | 559,570 | ||||||||
Mortgage-backed securities | 107,827 | 4,390 | - | 112,217 | ||||||||||||
$ | 656,838 | $ | 15,985 | $ | 1,036 | $ | 671,787 | |||||||||
Securities available for sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,999,229 | $ | 75 | $ | 21,508 | 2,977,796 | |||||||||
Mortgage-backed securities | 26,592,303 | - | 394,574 | 26,197,729 | ||||||||||||
$ | 29,591,532 | $ | 75 | $ | 416,082 | $ | 29,175,525 |
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 |
Mortgage-backed securities consist of securities guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac, and the Small Business Administration with amortized costs of $316,000, $14.5 million, $9.3 million, and $2.6 million, respectively, at December 31, 2017 ($1.7 million, $16.8 million, $6.7 million, and $3.1 million, respectively, at December 31, 2016).
Proceeds from the sale/call of securities available for sale amounted to $0 and $18,704,000 for the years ended December 31, 2017 and December 31, 2016, respectively. Net gains of $0 and $122,000 were recognized on these sales/calls for the years ended December 31, 2017 and 2016, respectively.
Proceeds from the sale/calls of securities held to maturity amounted to $3.1 million and $422,000 for the years ended December 31, 2017 and 2016, respectively. Net gains of $34,000 and $4,500 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, 2017 and 2016, 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.
F-14 |
3. SECURITIES (Cont’d)
December 31, 2017 | ||||||||||||||||
Held to Maturity | Available for Sale | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Within one year | $ | - | $ | - | $ | - | $ | - | ||||||||
After one to five years | 202,658 | 201,622 | 3,324,388 | 3,297,519 | ||||||||||||
After five to ten years | - | - | 3,427,174 | 3,371,664 | ||||||||||||
After ten years | 454,180 | 470,165 | 22,839,970 | 22,506,342 | ||||||||||||
$ | 656,838 | $ | 671,787 | $ | 29,591,532 | $ | 29,175,525 |
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 |
The following tables summarize the fair values and unrealized losses of securities with an unrealized loss at December 31, 2017 and 2016, 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, 2017 | ||||||||||||||||
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 | $ | 1,488,655 | $ | 11,107 | $ | 989,189 | $ | 10,401 | ||||||||
Mortgage-backed securities | 7,791,601 | 58,819 | 18,406,128 | 335,755 | ||||||||||||
9,280,256 | 69,926 | 19,395,317 | 346,156 | |||||||||||||
Securities held to maturity: | ||||||||||||||||
State, county, and municipal obligations | 202,658 | 1,036 | - | - | ||||||||||||
$ | 9,482,914 | $ | 70,962 | $ | 19,395,317 | $ | 346,156 |
F-15 |
3. SECURITIES (Cont’d)
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 |
The unrealized losses are primarily due to changes in market interest rates subsequent to purchase. At December 31, 2017, a total of 40 securities were in an unrealized loss position (34 at December 31, 2016). 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, 2017 and December 31, 2016 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 available for sale, with a carrying value of approximately $6.4 million at December 31, 2017 have been pledged to secure advances from the Federal Home Loan Bank of New York.
F-16 |
4. LOANS RECEIVABLE, NET
December 31, | ||||||||
2017 | 2016 | |||||||
Mortgage loans: | ||||||||
Residential 1-4 family | $ | 22,328,431 | $ | 24,808,914 | ||||
Commercial and multi-family | 14,635,915 | 15,790,917 | ||||||
Home equity lines of credit | 433,193 | 524,414 | ||||||
37,397,539 | 41,124,245 | |||||||
Other loans: | ||||||||
Secured by savings accounts | 7,158 | 11,390 | ||||||
Student | 10,150,844 | 5,743,338 | ||||||
Commercial | 1,416,661 | 1,493,323 | ||||||
11,574,663 | 7,248,051 | |||||||
Total loans | 48,972,202 | 48,372,296 | ||||||
Less: | ||||||||
Deferred loan fees (costs and premiums), net | (333,105 | ) | (139,659 | ) | ||||
Allowance for loan losses | 507,235 | 466,893 | ||||||
174,130 | 327,234 | |||||||
$ | 48,798,072 | $ | 48,045,062 |
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 $151,000 and $160,000 at December 31, 2017 and 2016, respectively.
Activity in the allowance for loan losses is summarized as follows:
Year Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Balance at beginning of year | $ | 466,893 | $ | 463,243 | ||||
Provision for loan losses | 40,342 | 3,650 | ||||||
Balance at end of year | $ | 507,235 | $ | 466,893 |
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, 2017 and 2016. 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. |
F-17 |
4. LOANS RECEIVABLE, NET (Cont’d)
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. | |
● | 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. |
F-18 |
4. LOANS RECEIVABLE, NET (Cont’d)
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, 2017 | ||||||||||||||||||||||||
Mortgage Loans | ||||||||||||||||||||||||
Commercial | Commercial | |||||||||||||||||||||||
Residential | Real Estate and | and | ||||||||||||||||||||||
1-4 Family | Multi-Family | Home Equity | Student | Other | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Pass | $ | 21,729 | $ | 14,636 | $ | 417 | $ | 10,151 | $ | 1,424 | $ | 48,357 | ||||||||||||
Special Mention | 49 | - | - | - | - | 49 | ||||||||||||||||||
Substandard | 550 | - | 16 | - | - | 566 | ||||||||||||||||||
Total | $ | 22,328 | $ | 14,636 | $ | 433 | $ | 10,151 | $ | 1,424 | $ | 48,972 |
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 |
The following table provides information about loan delinquencies at the dates indicated:
December 31, 2017 | ||||||||||||||||||||||||||||
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 | $ | 177 | $ | - | $ | 336 | $ | 513 | $ | 21,815 | $ | 22,328 | $ | - | ||||||||||||||
Commercial and multi-family | - | - | - | $ | - | 14,636 | 14,636 | - | ||||||||||||||||||||
Home equity lines of credit | - | - | - | $ | - | 433 | 433 | - | ||||||||||||||||||||
Student loans | 48 | - | 27 | $ | 75 | 10,076 | 10,151 | 27 | ||||||||||||||||||||
Other loans | - | - | - | $ | - | 1,424 | 1,424 | - | ||||||||||||||||||||
$ | 225 | $ | - | $ | 363 | $ | 588 | $ | 48,384 | $ | 48,972 | $ | 27 |
F-19 |
4. LOANS RECEIVABLE, NET (Cont’d)
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 | $ | - |
There were no impaired loans or troubled debt restructured loans at December 31, 2017 and 2016.
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, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Residential 1-4 family | $ | 599 | $ | 609 | ||||
Commercial and multi-family | - | - | ||||||
Home equity lines of credit | 16 | 21 | ||||||
Student loans | - | - | ||||||
Other loans | - | - | ||||||
Total non-accrual loans | 615 | 630 | ||||||
Accruing loans delinquent 90 days or more | 27 | - | ||||||
Total non-performing loans | $ | 642 | $ | 630 |
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 $31,300 and $39,500 for the year ended December 31, 2017 and 2016, respectively. The total amount of interest income recognized on non-accrual loans amounted to approximately $16,800 and $36,800 during the year ended December 31, 2017 and 2016, respectively.
F-20 |
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, 2017 | ||||||||||||||||||||||||||||
Mortgage Loans | ||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||
Residential | and | |||||||||||||||||||||||||||
1-4 Family | Multi-Family | Home Equity | Student | Other | Unallocated | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Beginning balance | $ | 297 | $ | 138 | $ | 5 | $ | 20 | $ | 7 | $ | - | $ | 467 | ||||||||||||||
Provision for loan losses | 21 | (17 | ) | (1 | ) | 34 | 3 | - | 40 | |||||||||||||||||||
Ending Balance | $ | 318 | $ | 121 | $ | 4 | $ | 54 | $ | 10 | $ | - | $ | 507 |
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 |
5. PREMISES AND EQUIPMENT, NET
December 31, | ||||||||
2017 | 2016 | |||||||
Land and land improvements | $ | 766,939 | $ | 766,939 | ||||
Building and building improvements | 2,528,451 | 2,502,142 | ||||||
Furniture, fixtures and equipment | 860,523 | 857,110 | ||||||
4,155,913 | 4,126,191 | |||||||
Less accumulated depreciation | (2,926,456 | ) | (2,790,537 | ) | ||||
$ | 1,229,457 | $ | 1,335,654 |
Depreciation expense for the years ended, December 31, 2017 and 2016, was $135,919 and $145,204, respectively.
F-21 |
6. ACCRUED INTEREST RECEIVABLE
December 31, | ||||||||
2017 | 2016 | |||||||
Loans | $ | 406,295 | $ | 337,844 | ||||
Mortgage-backed securities | 72,979 | 78,400 | ||||||
Investment securities | 10,965 | 26,818 | ||||||
$ | 490,239 | $ | 443,062 |
7. DEPOSITS
December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Rate | Amount | Rate | Amount | |||||||||||||
Non-interest bearing checking | 0.00 | % | $ | 4,816,982 | 0.00 | % | $ | 4,242,735 | ||||||||
NOW accounts | 0.05 | % | 12,172,345 | 0.05 | % | 12,354,063 | ||||||||||
Regular savings and clubs | 0.10 | % | 21,864,032 | 0.10 | % | 22,190,260 | ||||||||||
Super saver | 0.15 | % | 6,168,913 | 0.15 | % | 6,957,107 | ||||||||||
Money market | 0.10 | % | 3,413,996 | 0.10 | % | 2,946,249 | ||||||||||
48,436,268 | 48,690,414 | |||||||||||||||
Certificates of deposit | 0.85 | % | 24,122,546 | 0.83 | % | 25,597,182 | ||||||||||
0.34 | % | $ | 72,558,814 | 0.34 | % | $ | 74,287,596 |
Certificates of deposit are summarized by remaining period to contractual maturity as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
One year or less | $ | 17,403 | $ | 15,988 | ||||
Over one to three years | 5,361 | 8,333 | ||||||
Over three years | 1,359 | 1,276 | ||||||
$ | 24,123 | $ | 25,597 |
Certificates of deposit with balances of $100,000 or more totaled $9.3 million and $9.0 million at December 31, 2017 and 2016, 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.
F-22 |
7. DEPOSITS (Cont’d)
Interest expense on deposits is summarized as follows:
Year Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
NOW | $ | 5,764 | $ | 6,488 | ||||
Savings and clubs | 32,784 | 33,343 | ||||||
Money market | 3,177 | 2,985 | ||||||
Certificates of deposit | 186,295 | 268,451 | ||||||
$ | 228,021 | $ | 311,267 |
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
Advances from the Federal Home Loan Bank of New York totaled $0 and $3,000,000 as of December 31, 2017 and 2016, respectively. The advance at December 31, 2016 carried an interest rate of 0.81% and matured on January 31, 2017.
At December 31, 2017, the Company had a borrowing capacity at the FHLB of $25.7 million and access to a line of credit at Atlantic Community Bankers Bank of $2,000,000 of which no balances were outstanding at December 31, 2017.
See Note 3 to the consolidated financial statements regarding securities pledged as collateral for such advances.
9. INCOME TAXES
The components of income taxes are summarized as follows:
Year Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Current tax expense (benefit): | ||||||||
Federal | $ | - | $ | - | ||||
State | 18,000 | 19,395 | ||||||
18,000 | 19,395 | |||||||
Deferred tax expense (benefit): | ||||||||
Federal | 436,980 | (40,111 | ) | |||||
State | (76,638 | ) | (14,032 | ) | ||||
360,342 | (54,143 | ) | ||||||
State valuation allowance, net | 33,422 | 113,236 | ||||||
$ | 411,764 | $ | 78,488 |
F-23 |
9. INCOME TAXES (Cont’d)
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, | ||||||||
2017 | 2016 | |||||||
Federal income tax expense (benefit) | $ | 28,803 | $ | (13,237 | ) | |||
Impact of Tax Reform | 422,910 | - | ||||||
State income tax expense (benefit) | (15,974 | ) | 3,540 | |||||
Income from life insurance | (20,732 | ) | (19,615 | ) | ||||
Tax-exempt interest | (4,737 | ) | (6,107 | ) | ||||
Other | (31,928 | ) | 671 | |||||
State valuation allowance, net | 33,422 | 113,236 | ||||||
Actual income tax (benefit) | $ | 411,764 | $ | 78,488 |
The components of deferred tax assets and liabilities are as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Deferred tax assets: | ||||||||
Depreciation | $ | 102,918 | $ | 120,917 | ||||
Benefit plan liabilities | 88,510 | 184,596 | ||||||
Allowance for loan losses | 126,770 | 165,192 | ||||||
Charitable contribution carryover | 3,362 | 4,113 | ||||||
Net operating loss carryover | 595,124 | 722,316 | ||||||
Unfunded pension liability | 303,719 | 533,578 | ||||||
Unrealized loss on securities available for sale | 87,361 | 262,710 | ||||||
1,307,764 | 1,993,422 | |||||||
Valuation allowance | (222,208 | ) | (171,569 | ) | ||||
Total deferred tax assets | 1,085,556 | 1,821,853 | ||||||
Deferred tax liabilities: | ||||||||
Discounts on investments | 299 | 1,069 | ||||||
Prepaid benefit plans | 393,200 | 533,584 | ||||||
Net deferred loan costs/fees | 9,476 | 15,533 | ||||||
Other | 143 | 1,092 | ||||||
Total deferred tax liabilities | 403,118 | 551,278 | ||||||
Net deferred tax assets | $ | 682,438 | $ | 1,270,575 |
F-24 |
9. INCOME TAXES (Cont’d)
At December 31, 2017, the Company had a federal net operating loss carryover of $1,672,000 and a New York state net operating loss carryover of $2,828,000 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 $222,000 has been established on the entire 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.
On December 22, 2017, the President signed into law the Tax Act. The new law reduces the federal corporate income tax rate from 34% to 21% for tax years beginning after December 31, 2017. Under ASC 740, “Income Taxes”, companies are required to recognize the effect of tax law changes in the period of enactment; therefore, the Company re-measured its deferred tax assets and liabilities at the enacted tax rate expected to apply when its temporary differences are expected to be realized or settled. As of the date of enactment, the resulting impact of the re-measurement of the Company’s deferred tax balances was $422,910.
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, 2017 included approximately $1,700,000 of such bad deductions for which income taxes have not been provided.
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, | ||||||||
2017 | 2016 | |||||||
Change in projected benefit obligation: | ||||||||
Projected benefit obligation at beginning of year | $ | 2,529,326 | $ | 2,527,286 | ||||
Interest cost | 105,571 | 105,479 | ||||||
Actuarial loss | 49,487 | 79,868 | ||||||
Benefits paid | (187,503 | ) | (183,307 | ) | ||||
Projected benefit obligation at end of year | 2,496,881 | 2,529,326 | ||||||
Change in fair value of plan assets: | ||||||||
Fair value of plan assets at beginning of year | 2,211,641 | 2,205,668 | ||||||
Actual return on plan assets | 286,545 | 189,280 | ||||||
Employer contributions | 32,906 | - | ||||||
Benefits paid | (187,503 | ) | (183,307 | ) | ||||
Fair value of plan assets at end of year | 2,343,589 | 2,211,641 | ||||||
Funded status of plan included in other liabilitites | $ | (153,292 | ) | $ | (317,685 | ) |
F-25 |
10. BENEFIT PLANS (Cont’d)
Pension Plan (Cont’d)
As of December 31, 2017 and 2016, the components of accumulated other comprehensive loss on a pretax basis are an unrecognized actuarial loss of $1,446,279 and $1,569,348, 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 2018 is $48,406.
The weighted average assumptions used to determine the Plan’s benefit obligation are as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Discount rate | 4.50 | % | 4.50 | % | ||||
Salary increase rate | N/A | N/A |
The components of net periodic plan cost is as follows:
Year Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Components of net periodic plan cost (credit): | ||||||||
Interest cost | $ | 105,571 | $ | 105,479 | ||||
Expected return on assets | (165,866 | ) | (164,589 | ) | ||||
Amortization of unrecognized loss | 51,878 | 95,564 | ||||||
Net periodic plan cost (credit) included in compensation and benefits expense | (8,417 | ) | 36,454 | |||||
Changes in benefit obligation recognized in other comprehensive (income) loss: | ||||||||
Net loss (gain) | (71,191 | ) | 55,177 | |||||
Amortization of loss | (51,878 | ) | (95,564 | ) | ||||
Benefit obligation recognized in other comprehensive (income) loss | (123,069 | ) | (40,387 | ) | ||||
Total recognized in net periodic plan cost and other comprehensive (income) loss | $ | (131,486 | ) | $ | (3,933 | ) |
The weighted average assumptions used to determine net periodic plan cost are as follows:
Year Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
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 | 25.38 | 9.75 |
F-26 |
10. BENEFIT PLANS (Cont’d)
Pension Plan (Cont’d)
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.
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%.
F-27 |
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, | ||||
2018 | 184,894 | |||
2019 | 192,647 | |||
2020 | 189,240 | |||
2021 | 183,653 | |||
2022 | 177,790 | |||
Years 2023-2027 | 840,058 | |||
$ | 1,768,282 |
The Company expects to contribute cash of $34,000 to the plan in 2018.
The fair values of the Association’s pension plan assets at December 31, 2017, by asset category (see note 14 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 | $ | 172,614 | $ | 172,614 | $ | - | $ | - | ||||||||
Corporate bonds (a) | 540,212 | - | 540,212 | - | ||||||||||||
Equity securities (b) | 1,630,763 | 1,630,763 | - | - | ||||||||||||
Total | $ | 2,343,589 | $ | 1,803,377 | $ | 540,212 | $ | - |
(a) Includes eight corporate bonds due within ten years rated BBB+ or better by the S&P.
(b) Includes 56 companies spread over various market sectors.
F-28 |
10. BENEFIT PLANS (Cont’d)
Pension Plan (Cont’d)
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.
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 for each of the years ended December 31, 2017 and 2016, 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.
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 $41,000 and $27,000 for the years ended December 31, 2017 and 2016, respectively.
F-29 |
10. BENEFIT PLANS (Cont’d)
Employee Stock Ownership Plan (Cont’d)
The ESOP shares were as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Allocated shares | 8,842 | 6,663 | ||||||
Shares committed to be released | 2,092 | 2,223 | ||||||
Unearned shares | 44,611 | 46,659 | ||||||
Total ESOP shares | 55,545 | 55,545 | ||||||
Fair value of unearned shares | $ | 758,387 | $ | 620,565 |
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 for each of the years ended December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and December 31, 2016, 2,100 shares of restricted stock vested each year. Expected future expense relating to these non-vested restricted shares at December 31, 2017 is $55,125 over a weighted average period of 2.5 years. There were no stock options outstanding as of December 31, 2017.
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, 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, 2017 and 2016, recorded obligations of $262,044 and $401,466, 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 $2,258,324 and $2,197,348 at December 31, 2017 and 2016, respectively. Total expense under these plans was approximately $2,800 and $4,700 for the years ended December 31, 2017 and 2016, respectively.
F-30 |
11. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders’ equity are as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Unrealized net loss on pension plan | $ | (1,446,279 | ) | $ | (1,569,348 | ) | ||
Unrealized loss on securities available for sale | (416,007 | ) | (772,676 | ) | ||||
Accumulated other comprehensive loss before taxes | (1,862,286 | ) | (2,342,024 | ) | ||||
Tax effect | 391,080 | 796,288 | ||||||
Accumulated other comprehensive loss | $ | (1,471,206 | ) | $ | (1,545,736 | ) |
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 $429,000 and $1.6 million at December 31, 2017 and 2016, respectively. The commitments at December 31, 2017, were at a fixed rate of 5.75%. In addition, the Company has outstanding undisbursed home equity and other lines of credit totaling $228,000 and $1.0 million at December 31, 2017 and 2016, 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, 2017 and 2016, the Company had a $2.0 million unsecured line of credit with Atlantic Community 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, 2017, 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.
F-31 |
13. REGULATORY CAPITAL (Cont’d)
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, 2017 and 2016 the Association exceeded all capital adequacy requirements to which it was subject (see tables below). There were no conditions or events since December 31, 2017 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 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, 2017 and 2016, respectively:
Actual | Minimum Capital Requirements | To be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Tangible Capital | 11,745 | 13.57 | % | 1,298 | 1.500 | % | N/A | - | ||||||||||||||||
Total Risked-based Capital | 12,252 | 25.90 | % | 4,376 | 9.250 | % | 4,731 | 10.00 | % | |||||||||||||||
Common Equity Tier 1 Capital | 11,745 | 24.82 | % | 2,720 | 5.750 | % | 3,075 | 6.50 | % | |||||||||||||||
Tier 1 Risk-based Capital | 11,745 | 24.82 | % | 3,430 | 7.250 | % | 3,785 | 8.00 | % | |||||||||||||||
Tier 1 Leverage Capital | 11,745 | 13.57 | % | 3,463 | 4.000 | % | 4,328 | 5.00 | % | |||||||||||||||
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 | % |
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.
F-32 |
A. Fair Value Measurements (Cont’d)
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, 2017 and 2016. 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.
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, 2017 and 2016:
Fair Value Measurements at December 31, | ||||||||||||||||
Description | Carrying Value | Quoted
Prices in | Significant
Other Observable Inputs (Level 2) | Significant
Unobservable Inputs (Level 3) | ||||||||||||
December 31, 2017: | ||||||||||||||||
Securities available for sale | $ | 29,175,525 | $ | - | $ | 29,175,525 | $ | - | ||||||||
December 31, 2016: | ||||||||||||||||
Securities available for sale | $ | 29,331,278 | $ | - | $ | 29,331,278 | $ | - |
There were no assets measured at fair value on a non-recurring basis at December 31, 2017 and 2016.
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).
F-33 |
A. Fair Value Disclosures (Cont’d)
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).
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.
F-34 |
14. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)
B. Fair Value Disclosures (Cont’d)
The carrying values and estimated fair values of financial instruments are as follows (in thousands):
December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,229 | $ | 1,229 | $ | 2,923 | $ | 2,923 | ||||||||
Securities held to maturity | 657 | 672 | 3,955 | 4,011 | ||||||||||||
Securities available for sale | 29,176 | 29,176 | 29,331 | 29,331 | ||||||||||||
Loans receivable | 48,798 | 48,909 | 48,045 | 48,488 | ||||||||||||
FHLB and other stock, at cost | 167 | 167 | 335 | 335 | ||||||||||||
Accrued interest receivable | 490 | 490 | 443 | 443 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | 72,559 | 72,609 | 74,288 | 74,308 | ||||||||||||
Advances from FHLB of N.Y. | - | - | 3,000 | 3,001 |
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-35 |
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 27, 2018 | 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 | March 27, 2018 | ||
Timothy D. Sullivan | and Director (Principal Executive Officer) | |||
/s/ Edward J. Lipkus | Vice President, Chief Financial Officer and Treasurer | March 27, 2018 | ||
Edward J. Lipkus | (Principal Financial and Accounting Officer) | |||
/s/ Gerardina Mirtuono | Senior Vice President, | March 27, 2018 | ||
Gerardina Mirtuono | Chief Operating Officer and Director | |||
/s/ William Boeckelman | Director | March 27, 2018 | ||
William Boeckelman | ||||
/s/ Lawrence P. Doyle | Director | March 27, 2018 | ||
Lawrence P. Doyle | ||||
/s/ Deborah J. Elliot | Director | March 27, 2018 | ||
Deborah J. Elliot | ||||
/s/ Desmond Lyons | Director | March 27, 2018 | ||
Desmond Lyons | ||||
/s/ Walter G. Montgomery | Director | March 27, 2018 | ||
Walter G. Montgomery |
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