|TEV||8||TEV/EBIT||46||TTM 2019-09-30, in MM, except price, ratios|
|Item 1. Business|
|Item 1A. Risk Factors|
|Item 1B. Unresolved Staff Comments|
|Item 2. Properties|
|Item 3. Legal Proceedings|
|Item 4. Mine Safety Disclosures.|
|Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities|
|Item 6. Selected Financial Data|
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations|
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk|
|Item 8. Financial Statements and Supplementary Data|
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure|
|Item 9A Controls and Procedures|
|Item 9B. Other Information|
|Item 10. Directors, Executive Officers and Corporate Governance|
|Item 11. Executive Compensation.|
|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.|
|Item 13. Certain Relationships and Related Transactions, and Director Independence.|
|Item 14. Principal Accounting Fees and Services.|
|Item 15. Exhibits and Financial Statement Schedules|
|Item 16. Form 10 - K Summary|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|[X]||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the fiscal ended December 31, 2020.|
|[ ]||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)
(State or other jurisdiction of
incorporation or organization)
|56 Main Street, Irvington, New York||10533|
|(Address of principal executive offices)||(Zip Code)|
Registrant’s telephone number, including area code: (914) 591-8000
Securities registered pursuant to Section 12(b) of the Act: None
|(Title of each class to be registered)|
(Name of each exchange on which
each class is to be registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES [ ] NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer [ ]||Accelerated filer [ ]|
|Non-accelerated filer [X]||Smaller reporting company [X]|
|Emerging growth company [ ]|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
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 based on the closing price ($8.62) as of June 29, 2020 was $5,920,121.
As of March 29, 2021, 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 2021 Annual Meeting of Shareholders.
TABLE OF CONTENTS
|ITEM 1A.||Risk Factors||32|
|ITEM 1B.||Unresolved Staff Comments||32|
|ITEM 3.||Legal Proceedings||32|
|ITEM 4.||Mine Safety Disclosures.||32|
|ITEM 5.||Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities||33|
|ITEM 6.||Selected Financial Data||34|
|ITEM 7.||Management’s Discussion and Analysis of Financial Condition and Results of Operations||34|
|ITEM 7A.||Quantitative and Qualitative Disclosures about Market Risk||45|
|ITEM 8.||Financial Statements and Supplementary Data||45|
|ITEM 9.||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure||46|
|ITEM 9A||Controls and Procedures||46|
|ITEM 9B.||Other Information||47|
|ITEM 10.||Directors, Executive Officers and Corporate Governance||47|
|ITEM 11.||EXECUTIVE COMPENSATION||47|
|ITEM 12.||SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS||47|
|ITEM 13.||CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE||48|
|ITEM 14.||PRINCIPAL ACCOUNTING FEES AND SERVICES||48|
|ITEM 15.||Exhibits and Financial Statement Schedules||48|
|ITEM 16.||FORM 10-K SUMMARY||49|
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;|
|●||economic and/or policy changes related to the COVID - 19 pandemic;|
|●||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 execute on our business strategy to increase commercial real estate and multi-family lending and commercial lending;|
|●||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.
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, 2020, Sunnyside Bancorp had consolidated assets of $97.5 million, liabilities of $85.9 million and equity of $11.6 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.
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 association 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, commercial and multi-family real estate loans, and student loans, and to a much more limited extent, commercial loans, home equity lines of credit and other loans (consisting primarily of loans secured by deposits and marketable securities). At December 31, 2020, $14.1 million, or 35.6%, of our total loan portfolio was comprised of owner-occupied, one- to four-family residential real estate loans, $15.0 million, or 37.7% was comprised of commercial real estate and multi-family mortgage loans, $5.2 million, or 13.1% was comprised of Paycheck Protection Program (“PPP”) loans, $4.0 million, or 10.0%, was comprised of student loans and $1.4 million, or 3.6%, was comprised of commercial, 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 of New York (“FHLB”) and the Federal Reserve Bank (“FRB”) of New York. There was $6.5 million of borrowings outstanding at December 31, 2020.
For the year ended December 31, 2020, the Company recorded a net loss of $236,000 compared to net loss of $338,000 for the year ended December 31, 2019. Net interest income decreased $134,000, the provision for loan losses increased $ 28,000, and the tax benefit decreased $37,000, partly offset by an increase in non-interest income of $88,000 and a decrease of $213,000 in non-interest expense.
Our current business strategy includes diversifying our loan portfolio to increase our jumbo residential and non-residential lending, including commercial and multi-family real estate lending, construction and commercial lending and increasing our non-interest income, as ways to improve our profitability in future periods.
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, 2020, $14.1 million, or 35.6%, 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 2015 through 2019 are provided below:
|●||The homeownership rate in Westchester County was 61.4%, compared to 53.9% in the State of New York;|
|●||The median home value in Westchester County was $540,600, compared to $313,700 in the State of New York;|
|●||The median household income in Westchester County was $96,610 compared to $68,486 in the State of New York;|
|●||Approximately 48.9% of the population of Westchester County held a bachelor’s degree or higher, compared to 36.6% in the State of New York; and|
|●||Approximately 8.4% of the population of Westchester County had incomes below poverty level, compared to 13.0% in the State of New York.|
Sunnyside Federal also makes loans on a regular basis to residents of Putnam and Rockland Counties, New York. Below are some key statistics, according to the US Census Bureau, on the economic outlook of Putnam and Rockland Counties for the period of 2015 through 2019:
|●||The homeownership rate in Putnam County and Rockland County was 81.8% and 68.3%, respectively, compared to 53.9% in the State of New York;|
|●||The median home value in Putnam County and Rockland County was $358,500 and $443,400, respectively, compared to $313,700 in the State of New York;|
|●||The median household income in Putnam County and Rockland County was $104,486 and $93,024, respectively, compared to $68,486 in the State of New York;|
|●||Approximately 39.6% and 41.1% of the population of Putnam County and Rockland County, respectively, held a bachelor’s degree or higher, compared to 36.6% in the State of New York; and|
|●||Approximately 5.2% and 12.5% of the population of Putnam County and Rockland County, respectively, had incomes below poverty level, compared to 13.0% 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, 2020 (the latest date for which information is available), our market share was 0.05% of total FDIC-insured deposits in Westchester, making us the 29th largest out of 34 financial institutions in Westchester County based upon deposit share as of that date.
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 and construction lending;|
|●||maintaining our strong asset quality profile through conservative loan underwriting;|
|●||managing interest rate risk by emphasizing the origination of shorter-term loans for retention in our portfolio;|
|●||continuing to attract and retain customers in our market area and build our “core” deposits consisting of demand, NOW, savings and money market accounts; and|
|●||opportunistically seek to purchase or sell loans in the future including whole or participations in one to four-family residential real estate loans, commercial and multi-family real estate loans and student loans.|
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, 2020, $14.1 million, or 35.6%, 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, 2020, $15.0 million, or 37.7% 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.
We also offer commercial loans that are not real estate secured, home equity lines of credit and other loans. At December 31, 2020, $6.6 million, or 16.7%, of our total loan portfolio was comprised of commercial loans, which included PPP loans, home equity and other 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, 2020 purchased loans accounted for $6.4 million of our total loan portfolio. We will opportunistically seek to purchase whole or participations in one- to four-family residential real estate loans and commercial and multi-family real estate loans in the future.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale.
|(Dollars in thousands)|
|Real estate loans:|
|One-to four-family residential||$||14,132||35.6||%||$||17,894||44.6||%|
|Commercial and multi-family residential||14,954||37.7||%||14,918||37.2||%|
|Home equity lines of credit||194||0.5||%||206||0.5||%|
|Commercial and other loans||1,231||3.1||%||1,191||3.0||%|
|Total loans receivable||39,696||100.0||%||40,098||100.0||%|
|Deferred loan fees (costs and premiums)||29||(171||)|
|Allowance for loan losses||401||429|
|Total loans receivable, net||39,266||39,840|
Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2021. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
|real estate||real estate||lines of||Student||PPP||Other|
|Due During the|
|2024 to 2025||784,760||2,962,556||-||262,548||-||-||$||4,009,864|
|2026 to 2030||3,426,308||6,956,880||-||985,266||-||315,162||$||11,683,616|
|2031 to 2035||3,429,949||-||191,368||60,622||-||-||$||3,681,939|
|2036 and beyond||6,466,905||2,546,454||-||2,548,022||-||79,471||$||11,640,852|
Fixed and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2020, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2021.
|Real estate loans:|
|One-to four-family residential||$||12,135||$||1,996||$||14,131|
|Commercial and multi-family residential||5,018||9,815||14,833|
|Home equity lines of credit||-||194||194|
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, 2020, $14.1 million, or 35.6% 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, 2020, 85.9% of our one- to four-family residential real estate loans were fixed-rate loans, and 14.1% 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 January 1, 2021 was generally $548,250 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.
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, 2020, we had $14.9 million in commercial and multi-family real estate loans, representing 37.7% of our total loan portfolio. Subject to future economic, market and regulatory conditions, we will continue to increase our emphasis on originations and purchases of commercial and multi-family real estate loans.
Generally, our commercial real estate and multi-family loans have terms of up to 10 years and amortize for a period of up to 25 years. Interest rates may be fixed or adjustable, and if adjustable then they are generally based upon a 5 year Treasury or Federal Home Loan Bank index or the Prime rate of interest.
Almost all of our commercial and multi-family real estate loans are collateralized by office buildings, mixed-use properties and multi-family real estate located in our market area.
We consider a number of factors in originating commercial and multi-family real estate loans, including non-owner occupied, one- to four-family residential real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial and multi-family real estate loans are appraised by outside independent appraisers who are approved by the board of directors on an annual basis. Personal guarantees are generally obtained from the principals of commercial and multi-family real estate loans.
Commercial and multi-family real estate loans, including non-owner occupied, one- to four-family residential real estate loans, entail greater credit risks compared to owner-occupied one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties.
Our loans-to-one borrower limit is 15% of Sunnyside Federal’s unimpaired capital, which limit was $1.9 million at December 31, 2020. 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, 2020, our average commercial real estate loan had a balance of $482,000. At that same date, our largest commercial real estate relationship totaled $1.3 million and was performing in accordance with its repayment terms.
Paycheck Protection Program Loans (“PPP”). We originated $6.2 million in PPP loans in 2020 and have $5.2 million in outstanding balances at December 31, 2020. These loans mature in two years and carry a 1% interest rate. We earned fees on these loans ranging from 3% to 5%. These fees are amortized over the life of the loans and the remaining balance of unearned fees totaled $138,000 at December 31, 2020.
Student 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 totaled $2.6 million at December 31, 2020 and have repayment terms up to 20 years. Our purchased portfolio is generally for consolidation student loans with repayment terms that do not exceed 10 years. These loans totaled $1.4 million at December 31, 2020. At December 31, 2020, student loans totaled $4 million and represented 10.0% 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.
Commercial Loans and Other. To a lesser extent, we offer commercial loans that are not real estate secured as well as passbook loans. At December 31, 2020, commercial and other loans totaled $1.2 million, or 3.1% of our loan portfolio.
Home Equity Lines of Credit. We offer home equity lines of credit secured by a first or second mortgage on residential property. Home equity lines of credit are made with adjustable rates, and with combined loan-to-value ratios of up to 80% on an owner-occupied principal residence.
Home equity lines of credit are generally underwritten using the same criteria that we use to underwrite one- to four-family residential real estate loans. Home equity lines of credit may be underwritten with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing first mortgage loan. Generally, our home equity lines of credit are originated with adjustable-rates based on the floating prime rate of interest and require interest paid monthly during the first five years and principal and interest for an additional 10 years. Home equity lines of credit are available in amounts of up to $250,000.
Home equity lines of credit have greater risk than one- to four-family residential real estate loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans, 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, 2020, our home equity lines of credit totaled $194,000 and were performing in accordance with their repayment terms.
Loan Originations, Purchases and Sales. Our loan originations are generated by our loan personnel operating at our banking office. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.
We have historically retained all of our loans in portfolio, but we may, subject to favorable market conditions, consider selling certain longer-term (15 years or greater), fixed-rate one-to-four family residential real estate loans.
We have, on occasion, purchased commercial real estate and one- to four-family residential real estate loans, and in recent years, student loans. At December 31, 2020, these types of purchased loans accounted for $6.4 million of our total loan portfolio. We will opportunistically seek to purchase loans in the future including whole or participations in one to four-family residential real estate loans, commercial and multi-family real estate loans and student loans.
The following table shows our loan origination, purchases and repayment activities for the years indicated.
|Year Ended December 31,|
|Total loans at beginning of year||$||40,098||$||43,249|
|Real estate loans:|
|One-to four-family residential||-||550|
|Commercial and multi-family||2,799||1,349|
|Home equity lines of credit||-||200|
|Total real estate loans||2,799||2,099|
|Total loans originated||$||9,140||$||2,099|
|One-to four-family residential||-||1,916|
|Commercial and multi-family||-||-|
|Total Loans Purchased||$||-||$||1,916|
|Commercial and multi-family||-||-|
|Total Loans Sold||$||-||$||-|
|Net loan activity||$||(402||)||$||(3,151||)|
|Total loans at end of year||$||39,696||$||40,098|
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, 2020, our largest credit relationship totaled $1.3 million and was secured by commercial real estate. At December 31, 2020, this relationship was performing in accordance with its repayment terms. Our second largest relationship at this date was a $1.3 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.
All commercial and multi-family real estate loans require approval from our board of directors. Our credit committee which is comprised of our President and Chief Executive Officer, our Chief Financial Officer and one outside director, has approval authority of up to $500,000 for one- to four-family residential real estate loans and up to $250,000 for home equity lines of credit.
Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the improved property is determined to be in a flood zone area.
Collection Procedures. When a residential mortgage borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. With respect to residential real estate loans, we generally send a written notice of non-payment to the borrower 15, 30, 60 and 90 days after a loan is first past due. When a loan becomes 90 days past due, the loan is turned over to our attorneys to ensure that further collection activities are conducted in accordance with applicable laws and regulations. All loans past due 90 days are put on non-accrual and reported to the board of directors monthly. If our attorneys do not receive a response from the borrower, or if the terms of any payment plan established are not followed, then foreclosure proceedings will be implemented. Management submits an Asset Classification Report detailing delinquencies to the board of directors on a monthly basis.
Delinquent Loans. The following table sets forth certain information regarding delinquencies in our loan portfolio.
|Loans Delinquent for|
|30-89 Days||90 Days and Over||Total|
|(Dollars in thousands)|
|At December 31, 2020|
|Real estate loans:|
|One to four-family residential||-||$||-||1||$||243||1||$||243|
|Commercial and multi-family||-||-||2||256||2||256|
|Home equity lines of credit||-||-||-||-||-||-|
|At December 31, 2019|
|Real estate loans:|
|One to four-family residential||3||$||252||-||$||-||3||$||252|
|Commercial and multi-family||-||-||-||-||-||-|
|Home equity lines of credit||-||-||-||-||-||-|
Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
|At December 31,|
|(Dollars in thousands)|
|Real estate loans:|
|One-to four-family residential||$||256||$||-|
|Commercial and multi-family||243||234|
|Home equity lines of credit||-||-|
|Accruing loans 90 days or more past due|
|Real estate loans:|
|One-to four-family residential||-||-|
|Commercial and multi-family||-||-|
|Home equity lines of credit||-||-|
|Total loans 90 days or more past due||-||-|
|Total non-performing loans||622||234|
|Real estate owned||-||-|
|Other non-performing assets||-||-|
|Total non-performing assets||$||622||$||234|
|Troubled debt restructurings:|
|Real estate loans:|
|One-to four family residential||$||239||$||241|
|Commercial and multi-family||-||-|
|Home equity lines of credit||-||-|
|Total non-performing loans to total loans||1.57||%||0.58||%|
|Total non-performing loans to total assets||0.64||%||0.27||%|
|Total non-performing assets to total assets||0.64||%||0.27||%|
For the year ended December 31, 2020, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $57,700. Interest income recognized on such loans for the year ended December 31, 2020 amounted to $6,000.
Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified as a loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “special mention” also may be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. If a classified asset is deemed to be impaired with measurement of loss, Sunnyside Federal will establish a charge-off of the loan pursuant to Accounting Standards Codification Topic 310, “Receivables.”
The following table sets forth information regarding classified assets and special mention assets at December 31, 2020 and 2019.
|At December 31,|
|Classification of Assets|
|Total Classified Asstes||$||565||$||369|
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, 2020, 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, 2020.
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 2020 and 2019, we recorded a provision of $122,000 and $94,000, respectively. The allowance for loan losses was $401,000 or 1.01% of total loans, at December 31, 2020, compared to $429,000, or 1.07% of total loans, at December 31, 2019. At both dates, the level of our allowance reflects management’s view of the risks inherent in the loan portfolio and high level of asset quality. Consistent with our business strategy, we intend to increase our originations of commercial and multi-family real estate and commercial loans. These types of loans generally bear higher risk than our one- to four-family residential real estate loans. Accordingly we would expect to increase our allowance for loans losses in the future as the balance of these types of loans increase in our portfolio.
The following table sets forth the analysis of the activity in the allowance for loan losses for the fiscal years indicated:
|At or For the Years Ended December 31,|
|Balance at beginning of year||$||429||$||408|
|Real estate loans:|
|One-to four-family residential||-||-|
|Commercial and multi-family||-||-|
|Home equity lines of credit||-||-|
|Real estate loans:|
|One-to four-family residential||-||-|
|Commercial and multi-family||-||-|
|Home equity lines of credit||-||-|
|Provision for loan losses||122||94|
|Balance at end of year||$||401||$||429|
|Net charge-offs to average loans outstanding||0.37||%||0.17||%|
|Allowance for loan losses to non-performing loan at end of year||64.5||%||183.3||%|
|Allowance for loan losses to total loans at end of year||1.01||%||1.07||%|
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.
|At December 31,|
|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|
|Real estate loans:|
|One-to four-family residential||98||24.4||%||35.6||%||142||33.1||%||44.6||%|
|Commercial and multi-family residential||127||31.7||%||37.7||%||134||31.2||%||37.2||%|
|Home equity lines of credit||1||0.3||%||0.5||%||2||0.5||%||0.5||%|
|Total allowance for loan losses||401||100.0||%||100.0||%||429||100.0||%||100.0||%|
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 and our Chief Operating Officer 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, 2020, our investment portfolio consisted of securities and mortgage-backed securities issued by U.S. Government agencies or U.S. Government-sponsored enterprises and state and political subdivisions as well as insured bank certificates of deposit. 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, 2020, we owned $141,000 in FHLB stock. At December 31, 2020, we had no investments in a single company or entity (other than an agency of the U.S. Government or a U.S. Government-sponsored enterprise) that had an aggregate book value in excess of 10% of our equity.
The following table sets forth the amortized cost and fair value of our securities portfolio (excluding common stock we hold in the Federal Home Loan Bank of New York and in the Atlantic Community Bankers Bank) at the dates indicated.
|At December 31,|
|Securities held to maturity:|
|State, county, and municipal obligations||$||347||$||368||$||347||$||362|
|Total securities held to maturities||421||442||424||441|
|Securities available for sale:|
|U.S. government and agency securities||$||20,246||$||20,252||$||7,832||$||7,781|
|Total securities available for sale||$||49,408||$||50,027||$||37,916||$||37,979|
The following table sets forth the amortized cost and fair value of our insured bank certificates of deposit at the dates indicated.
|At December 31,|
|Certificates of Deposit|
|Maturing in after 5 to10 years||$||500||$||500||$||999||$||997|
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2020 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.
|More than One year||More than Five Years||More than Ten|
|One Year or Less||through Five Years||through Ten Years||Years||Total Securities|
|(Dollars in thousands)|
|Securities held to maturity:|
|State, county and municipal securities||$||-||-%||$||-||-%||$||-||-%||$||347||3.27||%||$||347||$||368||3.27||%|
|Total securities held to maturity||$||-||-%||$||-||-%||$||-||-%||$||421||3.25||%||$||421||$||442||3.25||%|
|Securities available for sale:|
|US government and agency securities||$||6,500||0.70||%||$||500||2.25||%||$||2,000||1.15||%||$||11,247||1.83||%||$||20,247||$||20,252||1.41||%|
|Total securities available for sale||$||6,500||0.70||%||$||6,100||3.99||%||$||3,330||1.43||%||$||33,479||1.80||%||$||49,409||$||50,027||1.82||%|
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 FHLB to fund our operations and we had $1.4 million and $1.7 million in advances at December 31, 2020 and 2019, respectively. We can also borrow from the Federal Reserve Bank of NY and had $5.1 million and $0 in advances at December 31, 2020 and 2019, 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, 2020, $29.7 million, or 37.9% of our total deposit accounts were certificates of deposit, of which $22.7 million had maturities of one year or less.
The following tables set forth the distribution of our average deposit accounts, by account type, for the years indicated.
|Certificates of Deposits||30,708||40.2||%||1.88||%||26,602||38.1||%||2.02||%|
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
|At December 31,|
|Less than 2.00%||$||22,821||$||3,652|
|2.00% to 2.99%||6,830||26,301|
|3.00% and above||-||-|
Maturities of Certificates of Deposit Accounts. The following table sets forth the amount and maturities of certificates of deposit accounts at the dates indicated.
|At December 31, 2020|
|Period to Maturity|
|Less Than or Equal to One Year||More Than One to Two Years||More Than Two to Three Years||More Than Three Years||Total||Percent of Total|
|Interest Rate Range:|
|Less than 2.00%||$||16,321||$||4,743||$||1,569||$||188||$||22,821||77.0||%|
|2.00% to 2.99%||6,389||441||-||-||6,830||23.0||%|
|3.00% to 3.99%||-||-||-||-||-||-|
As of December 31, 2020, the aggregate amount of outstanding certificates of deposit at Sunnyside Federal in amounts greater than or equal to $100,000 was approximately $17.6 million. The following table presents the maturity of these certificates of deposit at such date.
|Period to Maturity||At December 31, 2020|
|Three months or less||$||2,335|
|Over three through six months||2,453|
|Over six months through one year||8,788|
|Over one year to three years||4,035|
|Over three years||-|
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:
|At or For the Years Ended December 31,|
|Balance at end of period||$||1,383||$||1,750|
|Average balance during period||1,553||1,852|
|Maximum outstanding at any month end||1,720||2,900|
|Interest rate at end of period||2.20||%||2.20||%|
|Average interest rate during period||2.20||%||2.38||%|
We also obtained advances from the Federal Reserve Bank of New York. These advances totaled $5,118,395 and $0 at December 31, 2020 and December 31, 2019, respectively. These advances were made under the Paycheck Protection Program Liquidity Facility to fund Small Business Administration Paycheck Protection Program (“PPP”) loans that were originated in the second quarter of 2020. The advances have an interest rate of 0.35% and are collateralized by the related PPP loans. The advances must be repaid when the collateral loans are paid off. The collateral loans have a maturity of two years.
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.
As of December 31, 2020, we had 10 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
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.
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.
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.
Capital Requirements. Federal regulations require FDIC-insured depository institutions, including federal savings associations, to meet several minimum capital standards: a common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a Tier 1 capital to risk-weighted assets ratio of 6.0%, a total capital to risk-weighted assets of 8.0%, and a 4.0% Tier 1 capital to adjusted average total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Sunnyside Federal has exercised the opt-out and therefore does not include AOCI in its regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, an institution’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on the risk deemed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until it was fully implemented at 2.5% on January 1, 2019.
Legislation enacted in May 2018 requires the federal banking agencies, including the Federal Reserve Board, to establish a “community bank leverage ratio” of between 8% to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions with capital meeting the specified requirements and electing to follow the alternative framework are deemed to comply with the applicable regulatory capital requirements, including the risk based requirements. The federal regulators issued a final rule that set the optional “community bank leverage ratio” at 9%. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two quarter grace period to regain compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable regulatory capital requirements.
The CARES Act lowered the community bank leverage ratio to 8%, with federal regulation making the reduced ratio effective April 23, 2020. Another regulation was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.
At December 31, 2020, Sunnyside Federal’s capital exceeded all applicable requirements.
Prompt Corrective Action. Under the federal Prompt Corrective Action statute, the OCC is required to take supervisory actions against undercapitalized institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital. An institution that has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio of less than 4.5% or a leverage ratio of less than 4% is considered to be “undercapitalized.” A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.”
Generally, the OCC is required to appoint a receiver or conservator for a federal savings association that becomes “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC 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 5.0% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC 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 restrictions on capital distributions and asset growth. The OCC 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.
At December 31, 2020, Sunnyside Federal met the criteria for being considered “well capitalized,” which means that its total risk-based capital ratio exceeded 10%, its Tier 1 risk-based ratio exceeded 8.0%, its common equity Tier 1 ratio exceeded 6.5% and its leverage ratio exceeded 5.0%.
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, 2020, 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.
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, 2020, 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.
In June 2020, the OCC issued a final rule clarifying and expanding the activities that qualify for Community Reinvestment Act credit and, according to the agency, seeking to create a more consistent and objective method for evaluating Community Reinvestment Act performance. The final rule was effective October 1, 2020, but compliance with certain of the revised requirements is not mandatory until January 1, 2024 for institutions of Sunnyside Federal’s asset size.
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 OCC 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 OCC 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 OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Insurance of Deposit Accounts. Sunnyside Federal is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in Sunnyside Federal are insured up to a maximum of $250,000 for each separately insured depositor.
Under the FDIC’s risk-based assessment system, institutions deemed less risky of failure pay lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Sunnyside Federal. Future insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated by the FDIC upon a finding that the 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 regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
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 Bank Secrecy Act and the Office of Foreign Assets Control regulations; and|
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, 2020, 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);|
|●||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.
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.
Capital. Savings and loan holding companies of under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.
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.
Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company, such as Sunnyside Bancorp, Inc., unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. There is a presumption of control upon the acquisition of 10% or more of a class of voting stock under certain circumstances, such as where the holding company involved has its shares registered under the Securities Exchange Act of 1934.
The Federal Reserve Board has adopted a final rule, effective September 30, 2020, that revises its framework for determining whether a company has a “controlling influence” over a bank or savings and loan holding company for purposes of the Bank and Savings and Loan Holding Company Acts.
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.
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. Since Sunnyside Federal is not a large savings institution, the reserve method is still used.
Minimum Tax. On December 22, 2017, the president signed into law the Tax Act, which eliminated the Alternative Minimum Tax. Certain previous payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2020, we had no minimum tax credit carryforward.
Net Operating Loss Carryovers. Prior to 2020, a corporation could carry forward net operating losses (“NOLs”) generated in tax years beginning after December 31, 2017 indefinitely and could offset up to 80% of taxable income. NOLs generated in taxable years beginning before 2018 could be carried forward 20 years. To provide financial assistance and liquidity to taxpayers during the COVID-19 pandemic, the CARES Act amended the federal income tax rules with regard to the usage of NOLs for corporate taxpayers. The CARES Act allows for the carryback of losses arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five taxable years preceding the taxable year of the loss. The CARES Act also temporarily repeals the 80% limitation for NOLs arising in tax years beginning after December 31, 2017 and beginning before January 1, 2021 and carried to another tax year. The New York NOL carryforward period is 20 years. At December 31, 2020, Sunnyside Federal had $2,500,000 of federal NOL carry-forwards and $3,771,000 of New York State NOL carry-forwards available for future use.
Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any non-deducted 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 28.9% of New York franchise tax, as calculated with certain adjustments.
In March 2014, tax legislation was enacted that changed the manner in which financial institutions and their affiliates are taxed in New York State. The most significant changes affecting the Company are summarized below:
|●||The statutory tax rate was reduced.|
|●||An alternative tax on apportioned capital is imposed to the extent that it exceeds the tax on apportioned income. The New York State alternative tax is capped at $5 million for a tax year and is gradually phased out over six years.|
|●||Thrift institutions that maintain a qualified residential loan portfolio are entitled to a specially computed modification that reduces the income taxable to New York State.|
While most of the provisions of the law are effective for fiscal years beginning in 2015, the New York State statutory tax rate was not reduced until 2016. 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 which totals $243,000 as of December 31, 2020. 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.
The presentation of Risk Factors is not required for smaller reporting companies such as Sunnyside Bancorp.
We operate from our office located at 56 Main Street, Irvington, New York 10533. The aggregate net book value of our premises was $989,000 at December 31, 2020.
At December 31, 2020, 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.
(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 23, 2021 was 72. 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.
Sunnyside Bancorp, Inc. does not currently pay cash dividends on its common stock. Dividend payments by Sunnyside Bancorp, Inc. are dependent, in part, on dividends it receives from Sunnyside Federal, because Sunnyside Bancorp, Inc. has no source of income other than dividends from Sunnyside Federal and interest payments with respect to our loan to the Employee Stock Ownership Plan.
The Federal Reserve Board has issued supervisory policies providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Federal Reserve Board guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. In addition, Sunnyside Federal’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by regulations and policies of the Federal Reserve Board and the Office of the Comptroller of the Currency, may be paid in addition to, or in lieu of, regular cash dividends.
The following table presents quarterly market information for Sunnyside Bancorp, Inc.’s common stock for the years ended December 31, 2020 and 2019:
|2020||High Sale||Low Sale|
|Quarter ended December 31||$||13.95||$||11.55|
|Quarter ended September 30||$||11.60||$||8.61|
|Quarter ended June 30||$||9.95||$||6.65|
|Quarter ended March 31||$||13.30||$||6.49|
|2019||High Sale||Low Sale|
|Quarter ended December 31||$||13.00||$||12.28|
|Quarter ended September 30||$||13.25||$||12.25|
|Quarter ended June 30||$||14.50||$||12.20|
|Quarter ended March 31||$||13.00||$||11.45|
|(b)||Sales of Unregistered Securities. Not applicable.|
|(c)||Use of Proceeds. Not applicable.|
|(d)||Securities Authorized for Issuance Under Equity Compensation Plans.|
Set forth below is information as of December 31, 2020 with respect to compensation plans (other than our Employee Stock Ownership Plan) under which Company equity securities are authorized for issuance. Other than our Employee Stock Ownership Plan, we do not have any equity compensation plans that were not approved by our stockholders. Equity compensation plans approved by stockholders consist of the Sunnyside Bancorp, Inc. 2014 Equity Incentive Plan (the “2014 Equity 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||0||n/a||92,655||(1)|
|Equity Compensation Plans Not Approved by Stockholders||0||n/a||0|
(1) The Company has not issued any stock options pursuant to the 2014 Equity Plan. The Company granted 10,500 restricted shares under the 2014 Equity Plan on June 16, 2015.
(e) Stock Repurchases. Not applicable.
(f) Stock Performance Graph. Not required for smaller reporting companies.
Not required for smaller reporting companies.
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, 2020 and December 31, 2019 and our results of operations for the years ended December 31, 2020 and 2019. 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.
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, commercial and multi-family real estate loans, and student loans, and to a much more limited extent, commercial, home equity lines of credit and other loans (consisting primarily of loans secured by deposits and marketable securities). At December 31, 2020, $14.1 million or 35.6% of our total loan portfolio was comprised of owner-occupied, one-to four family residential real estate loans; $15.0 million or 37.7% was comprised of commercial and multi-family real estate loans, $5.2 million or 13.1% was comprised of PPP loans, $4.0 million or 10.0% was comprised of student loans and $1.4 million, or 3.6%, was comprised of commercial, home equity and passbook loans.
As a result of our conservative underwriting and credit monitoring processes, we had $622,000 in non-performing assets at December 31, 2020 and $234,000 at December 31, 2019. There were $572,000 of delinquent loans at December 31, 2020 compared to $1.6 million of delinquent loans at December 31, 2019.
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 borrow from the Federal Home Loan Bank of New York to fund our operations and we had $1.4 million and $1.7 million in advances at December 31, 2020 and 2019, respectively. We can also borrow from the Federal Reserve Bank of NY and had $5.1 million and $0 in advances at December 31, 2020 and 2019, respectively.
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.
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.
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, 2020, 88.1% of our securities were issued by U.S. government agencies or U.S. government-sponsored enterprises.
Comparison of Financial Condition at December 31, 2020 and December 31, 2019
Total assets increased $11.3 million, or 13.1%, to $97.5 million at December 31, 2020 from $86.2 million at December 31, 2019. The increase was primarily the result of an increase in investments.
Securities available for sale increased $12.0 million, or 31.7%, to $50 million at December 31, 2020 from $38.0 million at December 31, 2019 while securities held to maturity decreased $3,000, or 0.8%, to $421,000 at December 31, 2020 from $424,000 at December 31, 2019. The increase in securities available for sale was primarily due to purchases of government and mortgage-backed securities exceeding maturities and pay-downs while the decrease in securities held to maturity was primarily due to pay-downs on mortgage backed securities.
Net loans receivable decreased $573,000, or 1.4 %, to $39.3 million at December 31, 2020 from $39.8 million at December 31, 2019. The decrease in loans receivable during 2020 was primarily due to a decrease of $1.9 million, or 32.6% in the student loan portfolio, a decrease of $3.8 million, or 21.0 %, in residential 1-4 family loans offset in part by an increase in commercial loans of $5.2 million or 439.1%.
Cash and cash equivalents increased $326,000, or 17.9% to $2.1 million at December 31, 2020 compared to $1.8 million at December 31, 2019.
Principal payments reduced the held to maturity securities portfolio by $3,000, or 0.8%. Purchases of securities available for sale exceeded principal payments, calls, sales and maturities by $12.0 million, or 31.7%.
At December 31, 2020, our investment in bank-owned life insurance was $2.4 million, an increase of $57,000 or 2.4% from $2.4 million at December 31, 2019. 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.
Net deferred tax assets decreased $29,000, or 4.0%, to $685,000 at December 31, 2020 from $714,000 at December 31, 2019. The decrease resulted primarily from an increase in unrealized gains on securities.
Other assets, consisting primarily of prepaid insurance premiums, prepaid expenses, and investment receivables decreased $16,000, or 5.6%, to $276,000 at December 31, 2020 from $293,000 at December 31, 2019. The decrease was primarily due to decreases in prepaid insurance and prepaid expenses of $41,000 and $7,000, respectively, partly offset by increases in investment receivables of $24,000.
Total deposits increased $6.4 million, or 8.8%, to $78.3 million at December 31, 2020 from $71.9 million at December 31, 2019. The increase was primarily due to higher savings, NOW, non-interest bearing and money market balances, partly offset by lower certificates of deposit. Savings deposits increased $2.8 million or 11.8%, NOW balances increased $1.3 million, or 11.6%, non-interest bearing balances increased $1.8 million, or 45.1% and money market balances increased $654,000, or 25.7%, while certificates of deposits decreased $302,000, or 1.0%.
We had $5.1 million in Federal Reserve Bank advances outstanding at December 31, 2020 and $0 at December 31, 2019. We had $1.4 million in Federal Home Loan Bank advances outstanding at December 31, 2020 and $1.7 million at December 31, 2019. At December 31, 2020, we had the ability to borrow approximately $28.0 million from the Federal Home Loan Bank of New York, subject to our pledging sufficient assets. Additionally, at December 31, 2020, 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 $197,000, or 1.7%, to $11.6 million at December 31, 2020 compared to $11.4 million at December 31, 2019 primarily due to an increase in unrealized gains in our investment portfolio which is included in accumulated other comprehensive loss partly offset by our net loss of $236,000 for 2020.
Comparison of Operating Results for the Years Ended December 31, 2020 and 2019
For the year ended December 31, 2020, the Company recorded a net loss of $236,000 compared to net loss of $338,000 in 2019, primarily due to an $88,000 increase in non-interest income and a $213,000 decrease in non-interest expense, partly offset by a $134,000 decrease in net interest income, a $28,000 increase in the provision for loan losses and a $37,000 decrease in the tax benefit.
Our current business strategy includes increasing the Bank’s asset size, diversifying our loan portfolio to increase our non-residential lending, including commercial and multi-family real estate lending and commercial lending and increasing our non-interest income, as ways to improve our profitability in future periods.
Our ability to achieve profitability depends upon a number of factors, including general economic conditions, competition with other financial institutions, changes to the interest rate environment that may reduce our profit margins or impair our business strategy, adverse changes in the securities markets, changes in laws or government regulations, changes in consumer spending, borrowing, or saving, and changes in accounting policies.
Net Interest Income. Net interest income decreased $134,000, or 6.5%, to $1.9 million for the year ended December 31, 2020 from $2.1 million for the year ended December 31, 2019. The decrease in net interest income was due to an $85,000, or 3.2% decrease in interest income and a $48,000, or 7.7% increase in interest expense.
Interest income on loans decreased $104,000, or 5.7%, primarily due to decreases in the loan balances and yields. Interest income on investment securities increased $81,000 or 53.9%, primarily due to higher balances offset by lower rates. Interest income on mortgage-backed securities decreased $60,000 or 9.4%, primarily due to a decrease in yields offset by higher balances. Interest income on federal funds sold and other interest-earning assets decreased $1,000, or 3.2% mainly due to lower rates offset by higher balances. The average yield on our loans decreased 16 basis points, while average balances decreased $867,000. The average yield on our mortgage-backed securities decreased 41 basis points while average balances increased $2.8 million. The average yield on investment securities decreased 62 basis points, while the average balance increased $7.9 million during 2020. Our net interest rate spread decreased 49 basis points to 2.04% for the year ended December 31, 2020 from 2.53% for the year ended December 31, 2019, and our net interest margin decreased 48 basis points to 2.17% for 2020 from 2.65% for 2019.
Interest and Dividend Income. Interest and dividend income decreased $85,000 to $2.6 million for the year ended December 31, 2020 from $2.7 million for the year ended December 31, 2019. Interest on investment securities increased $81,000 or 53.9% but was offset by a decrease in loan interest income of $104,000 or 5.7% and a decrease in interest on mortgage backed securities of $60,000, or 9.4%, compared to 2019.
Interest income on loans decreased $104,000, or 5.7%, to $1.7 million for the year ended December 31, 2020 from $1.8 million for the year ended December 31, 2019. The decrease resulted primarily from a decrease of $867,000 in average loan balances to $41.0 million in 2020 from $41.9 million in 2019 and a 16 basis point decrease in the yield to 4.23% in 2020 from 4.39% for 2019 resulting from lower market interest rates year to year.
Interest income on mortgage-backed securities decreased $60,000 to $586,000 primarily due to a 41 basis point decrease in yield to 1.93% in 2020 from 2.34% in 2019, partly offset by an increase of $2.8 million in average balances. Interest on investment securities increased $81,000 to $230,000 primarily due to an increase of $7.9 million in average balances partly offset by a 62 basis point decrease in yield to 1.55% for 2020 from 2.17% for 2019. Interest and dividend income of federal funds sold and other earning assets decreased $1,000 to $36,000 mainly due to a 228 basis point decrease in yield from 3.90% in 2019 to 1.62% in 2020, partly offset by an increase in average balances of $1.3 million.
Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and borrowings, increased $48,000 to $670,000 for the year ended December 31, 2020 from $622,000 for the year ended December 31, 2019. The cost of interest-bearing deposits and borrowings decreased 4 basis points to 0.89% for 2020 compared to 0.93% for 2019, mainly reflecting a decrease in rates on certificates of deposit, partly offset by a $4.1 million increase in average balances.
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 $122,000 for the year ended December 31, 2020 compared to $94,000 for the year ended December 31, 2019. The increase was mainly due to higher provisions for the student loan portfolio. The allowance for loan losses was $401,000 at December 31, 2020 compared to $429,000 at December 31, 2019. We had $622,000 in non-performing loans at December 31, 2020 and $234,000 at December 31, 2019. During the years ended December 31, 2020 and 2019 we had loan charge-offs of $150,000 and $73,000, respectively. There were no recoveries in 2019 and 2020.
Noninterest Income. Noninterest income increased $88,000, or 50.4% to $264,000 for the year ended December 31, 2020 from $175,000 for the year ended December 31, 2019. The increase was primarily due to gains on the sale of securities of $124,000, partly offset by a decrease of $32,000 in fees and service charges.
Noninterest Expense. Noninterest expense decreased $213,000, or 8.3%, to $2.4 million for the year ended December 31, 2020 from $2.6 million for the year ended December 31, 2019. Compensation and benefits decreased $116,000, or 9.0%, to $1.2 million for 2020 from $1.3 million for 2019, primarily due to lower salaries and benefits expense. Occupancy and equipment expense increased $2,000, or 0.9%, primarily due to higher repairs and taxes, partly offset by lower utilities expense and equipment costs. Data processing fees increased $3,000 or 1.2%, primarily due to higher costs related to the Bank’s core processing. Professional fees decreased $128,000, or 24.8%, primarily due to lower legal fees. Federal deposit insurance premium expense increased $11,000, because the FDIC returned overpayments to the Deposit Insurance Fund which were primarily applied against premiums due in 2019.
Advertising expense increased $3,000 or 6.7%, primarily due to increased marketing initiatives in 2020. Other expense increased $10,000, or 5.8%, primarily due to higher correspondent bank charges.
Income Tax Expense. We recorded an income tax benefit of $71,000 for the year ended December 31, 2020 based on a loss before taxes of $306,000. In 2019, we recorded an income tax benefit of $108,000 based on a loss before taxes of $446,000.
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.
|For the Years Ended December 31,|
|Fed funds sold and other interest-earning assets||2,224||36||1.62||%||948||37||3.90||%|
|Total interest-earning assets||88,378|