SUNNYSIDE BANCORP : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

General

Management's discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2020 as well as the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" 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 quality of our loan and investment portfolios; and

  ? estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management 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.

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;

  ? the COVID-19 pandemic and its effects on the economic and business
    environments in which we operate;

  ? competition among depository and other financial institutions;

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

  ? adverse changes in the securities markets;

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

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

  ? our ability to consummate our announced plan of merger;

  ? our ability to execute on our business strategy to increase commercial real
    estate and multi-family lending and commercial lending, including implementing
    an SBA lending program;

  ? 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.




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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.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Company's Form 10-K for the year ended December 31, 2020.

Comparison of Financial Condition at June 30, 2021 and December 31, 2020

Total assets decreased $2.2 million, or 2.3 %, to $95.3 million at June 30, 2021 from $97.5 million at December 31, 2020. The decrease was primarily due to decreases in securities available for sale and loan balances of $2.0 million and $192,000, respectively. Total liabilities decreased $1.0 million from $85.9 million at December 31, 2020 to $84.9 million at June 30, 2021. Borrowings decreased $5.3 million and were partly offset by a $4.3 million increase in deposits.

Securities available for sale decreased $2.0 million, or 4.1%, to $48.0 million at June 30, 2021 from $50.0 million at December 31, 2020 primarily due to a decrease in U.S. government and agency obligations.

Net loans receivable decreased $192,000, or 0.5%, to $39.1 million at June 30, 2021 from $39.3 million at December 31, 2020. Residential 1-4 family loans and student loans decreased $484,000 and $564,000, respectively. These decreases were partly offset by a $742,000 increase in PPP loans.

At June 30, 2021, our investment in bank-owned life insurance increased $32,000 to $2.5 million from $2.4 million at December 31, 2020. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses, and we have not made any additional contributions to our bank-owned life insurance since 2002.

Deferred income taxes increased $116,000, or 16.9%, to $801,000 at June 30, 2021, from $685,000 at December 31, 2020 primarily due to the decrease in net unrealized gains on the available-for-sale investment portfolio.

Other assets, consisting primarily of prepaid insurance premiums and prepaid expenses decreased $84,000, or 30.5%, to $192,000 at June 30, 2021, compared to $276,000 at December 31, 2020, mainly due to a reduction in prepaid insurance and receivables.

Total deposits increased $4.3 million, or 5.5%, to $82.6 million at June 30, 2021 from $78.3 million at December 31, 2020. The increase resulted primarily from increases in non-interest bearing checking balances, certificates of deposit, NOW and savings balances of $2.5 million, $1.8 million, $321,000 and $191,000, respectively,

Borrowings decreased $5.3 million, or 81.6% from $6.5 million at December 31, 2020 to $1.2 million at June 30, 2021, primarily due to the pay-off of the PPP line with the Federal Reserve Bank of New York. At June 30, 2021, we had the ability to borrow an additional $27.4 million or 30% of the Association's assets in FHLB advances and $2.0 million on a Fed Funds line of credit with Atlantic Community Bankers Bank.

Total equity decreased to $10.4 million at June 30, 2021 from $11.6 million at December 31, 2020 resulting primarily from an increase in other comprehensive loss of $435,000 due to lower unrealized gains in the available-for-sale investment portfolio and a reduction of retained earnings of $794,000 due to losses recorded for the first six months of 2021.

Comparison of Results of Operations for the Quarters Ended June 30, 2021 and June 30, 2020

General. We recorded a net loss of $411,000 for the quarter ended June 30, 2021 compared to net loss of $96,000 for the quarter ended June 30, 2020. The increase in net loss resulted primarily from $384,000 of professional fees associated with the Company's announced merger, partly offset by an increase in net interest income.

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Net Interest Income. Net interest income increased $80,000 to $531,000 for the three months ended June 30, 2021 compared to $451,000 for the three months ended June 30, 2020, primarily due to a decrease in interest expense, partly offset by a decrease in interest and dividend income. Interest expense decreased $95,000, or 50.2%, to $94,000 for the 2021 quarter, compared to $189,000 for the 2020 quarter. Interest and dividend income decreased $15,000, or 2.3%, to $625,000 for the three months ended June 30, 2021 from $640,000 for the three months ended June 30, 2020.

The average yield on our loans decreased 15 basis points, the average yield on our investment securities decreased 53 basis points and the average yield on mortgage-backed securities decreased 15 basis points during the quarter ended June 30, 2021 compared to the same quarter in 2020. Our net interest rate spread increased 31 basis points to 2.23% for the quarter ended June 30, 2021 from 1.92% for the quarter ended June 30, 2020 and our net interest margin increased 23 basis points to 2.31% for the 2021 quarter from 2.08% for the 2020 quarter. Average interest-earning assets increased $5.0 million, or 5.7%, to $92.2 million for the quarter ended June 30, 2021 from $87.3 million for the quarter ended June 30, 2020.

Interest and Dividend Income. Interest and dividend income decreased $15,000, or 2.3%, to $625,000 for the quarter ended June 30, 2021 from $640,000 for the quarter ended June 30, 2020. The decrease resulted primarily from a $29,000, or 7.1% decrease in interest income on loans, partly offset by an increase in interest income on investment securities and mortgage-backed securities of $11,000, or 17.7% and $6,000, or 3.8%, respectively.

Interest income on loans decreased $29,000, or 7.1%, to $387,000 for the quarter ended June 30, 2021 from $416,000 for the quarter ended June 30, 2020. The decrease resulted primarily from a decrease of 15 basis points in the average yield on loans and a $1.6 million reduction in average balances.

Interest and dividend income on investment securities increased $11,000 primarily due to a $6.3 million increase in average balances to $17.7 million for the quarter ended June 30, 2021 from $11.4 million for the quarter ended June 30, 2020, partly offset by a decrease of 53 basis points in yield to 1.65% for the 2021 quarter from 2.18% for the 2020 quarter. Interest income on mortgage backed securities increased $6,000 primarily due to a 15 basis point increase in yield to 2.13% for the quarter ended June 30, 2021 from 1.98% for the quarter ended June 30, 2020, partly offset by a $1.2 million decrease in average balances. Interest income on federal funds sold and other earning assets decreased $2,000 to $6,000 for the three months ended June 30, 2021 from $8,000 for the three months ended June 30, 2020. This decrease was mainly due to a 51 basis point decrease in yield from 1.03% for the 2020 quarter to 0.52% for the 2021 quarter offset by a $1.5 million increase in average balances.

Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and advances from the FHLB decreased $95,000, or 50.2%, to $94,000 for the quarter ended June 30, 2021 from $189,000 for the quarter ended June 30, 2020. The decrease was primarily due to a decrease of $92,000 in interest expense on deposits and a $3,000 decrease in interest expense on FHLB advances. The cost of interest-bearing liabilities for the quarter ended June 30, 2021 decreased 54 basis points to 0.49% compared to 1.03% for the quarter ended June 30, 2020. Average interest-bearing liabilities increased $3.8 million, or 5.2%, to $77.5 million for the quarter ended June 30, 2021 from $73.6 million for the quarter ended June 30, 2020. The average balance of savings, NOW and money market deposits increased $3.4 million, $1.9 million and $423,000, respectively, partly offset by an $87,000 decrease in the average balance of certificates of deposit. The average balance of FHLB advances decreased $371,000 for the quarter ended June 30, 2021 to $1.3 million from $1.6 million for the quarter ended June 30, 2020, while the average balance of advances from the Federal Reserve decreased $1.4 million to $0 for the quarter ended June 30, 2021 compared to $1.4 million for the quarter ended June 30, 2020.

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. For the quarter ended June 30, 2021 we recorded a $9,000 provision compared to a $10,000 provision for the quarter ended June 30, 2020. The allowance for loan losses was $406,000 at June 30, 2021 compared to $401,000 at December 31, 2020. There were $22,000 in charge-offs and $9,000 in recoveries for the quarter ended June 30, 2021 compared to no charge-offs or recoveries for the three months ended June 30, 2020. (See Note 6 "Loans" and Note 11 "Contingencies" for an additional discussion on the Company's loan portfolio.)

Non-interest Income. Non-interest income increased $4,000, or 12.9%, to $35,000 for the quarter ended June 30, 2021 from $31,000 for the quarter ended June 30, 2020. The increase was primarily due to higher fees received on bank products and services and increased income on Bank Owned Life Insurance.

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Non-interest Expense. Non-interest expense increased $376,000, or 63.1%, to $972,000 for the quarter ended June 30, 2021 from $596,000 for the quarter ended June 30, 2020. The increase was primarily due to increases in merger related expenses, occupancy and equipment expense and data processing service fees, partly offset by a reduction in compensation and benefits expense. Merger related expenses increased $364,000, or 1,779.8%, primarily due to expenses related to the Company's announced merger. (See Note 2 "Plan of Merger"). Occupancy and equipment expense increased $4,000, or 6.4%, primarily due to higher depreciation of furniture and equipment and utility costs. Data processing costs increased $6,000, or 7.7% primarily due to higher core processing expenses. Compensation and benefits expense decreased $7,000, or 2.5%, primarily due to lower costs of benefits.

Income Tax Expense. We recorded a $4,000 income tax benefit for the quarter ended June 30, 2021 compared to a $27,000 income tax benefit for the quarter ended June 30, 2020. Income tax expense (benefit) is calculated based on pre-tax income or loss adjusted for permanent book to tax differences, such as non-taxable interest income on municipal securities, income on bank owned life insurance and non-deductible merger related expenses.

Comparison of Results of Operations for the six months ended June 30, 2021 and June 30, 2020

General. We recorded a net loss of $794,000 for the six months ended June 30, 2021 compared to net loss of $159,000 for the six months ended June 30, 2020. The increase in net loss resulted primarily from $745,000 of professional fees associated with the Company's announced merger, partly offset by an increase in net interest income.

Net Interest Income. Net interest income increased $172,000, or 18.4%, for the six months ended June 30, 2021 compared to the same period in 2020 primarily due to a decrease in interest expense, partly offset by a decrease in interest and dividend income. Interest expense decreased $195,000, or 49.8% to $196,000 for the six months ended June 30, 2021 from $391,000 for the six months ended June 30, 2020. Interest and dividend income decreased $23,000, or 1.7%, to $1.3 million for the six months ended June 30, 2021 from $1.3 million for the six months ended June 30, 2020.

Interest income on loans decreased $4,000, or 0.5%. The decrease in interest income on loans was primarily due to lower average balances, partly offset by an increase in loan yields. Average loan balances decreased $1.4 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The yield on the loan portfolio increased 14 basis points to 4.36% for the six months ended June 30, 2021 from 4.22% for the six months ended June 30, 2020. Interest income on investment securities increased $16,000, or 13.5%, primarily due to higher average balances, partly offset by lower yields. The average balance of investment securities increased $7.8 million for the six months ended June 30, 2021 compared to the same period in 2020, while the average yield decreased 82 basis points to 1.48% for the six months ended June 30, 2021 from 2.30% for the six months ended June 30, 2020. Interest on mortgage-backed securities decreased $21,000, or 6.4%, period to period. The average yield on mortgage-backed securities decreased two basis points to 2.10% for the six months ended June 30, 2021, while average balances decreased $1.7 million.

Our net interest rate spread increased 29 basis points to 2.33% for the six months ended June 30, 2021 from 2.04% for the six months ended June 30, 2020, and our net interest margin increased 20 basis points to 2.41% for the 2021 period from 2.21% for the 2020 period. Average interest-earning assets increased $8.0 million to $92.9 million for the six months ended June 30, 2021 from $84.9 million for the six months ended June 30, 2020.

Interest and Dividend Income. Interest and dividend income decreased $23,000, or 1.7%, to $1.3 million for the six months ended June 30, 2021 from $1.3 million for the six months ended June 30, 2020. The decrease resulted primarily from a $21,000, or 6.4%, decrease in interest income on mortgage-backed securities, a $14,000, or 55.2%, decrease in income from federal funds sold and other earning assets, and a $4,000, or 0.5%, decrease in interest income on loans, partly offset by a $16,000, or 13.5%, increase in interest income on investment securities.

Interest income on loans decreased $4,000, or 0.5%, to $850,000 for the six months ended June 30, 2021 from $855,000 for the six months ended June 30, 2020. The decrease resulted primarily from a decrease of $1.4 million in average balances, partly offset by an increase of 14 basis points in yield from 4.22% for the six months ended June 30, 2020 to 4.36% for the quarter ended June 30, 2021.

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Interest and dividend income on investment securities increased $16,000 primarily due to a $7.8 million increase in average balances to $18.1 million for the six months ended June 30, 2021 from $10.3 million for the six months ended June 30, 2020, partly offset by a decrease of 82 basis points in yield to 1.48% for the 2021 period from 2.30% for the 2020 period. Interest income on mortgage-backed securities decreased $21,000 primarily due to a two basis point reduction in yield to 2.10% for the six month period ended June 30, 2021 from 2.12% for the six month period ended June 30, 2020 and a $1.7 million decrease in average balances. Interest income on federal funds sold and other earning assets decreased $14,000 to $11,000 for the six months ended June 30, 2021 from $25,000 for the six months ended June 30, 2020. This decrease was mainly due to a 137 basis point decrease in yield to 0.37% for the 2021 period from 1.74% for the 2020 period.

Interest Expense. Interest expense, consisting of the cost of interest-bearing deposits and advances from the FHLB and the FRB, decreased $195,000, or 49.8%, to $196,000 for the six months ended June 30, 2021 from $391,000 for the six months ended June 30, 2020. The decrease was primarily due to a decrease of $193,000 in interest expense on deposits and a $1,500 decrease in interest expense on FHLB and FRB advances. The cost of interest-bearing liabilities for the six months ended June 30, 2021 decreased 60 basis points to 0.49% compared to 1.09% for the six months ended June 30, 2020. Average interest-bearing liabilities increased $6.2 million, or 8.6%, to $78.4 million for the six months ended June 30, 2021 from $72.2 million for the six months ended June 30, 2020. The average balance of savings, NOW, certificates of deposit and money market increased $3.2 million, $2.0 million, $885,000 and $479,000, respectively. The average balance of FHLB advances decreased $385,000 to $1.3 million for the six months ended June 30, 2021 from $1.6 million for the six months ended June 30, 2020, while the average balance of advances from the FRB increased $1.7 million to $2.4 million for the 2021 period from $692,000 for 2020 period.

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. For the six months ended June 30, 2021 we recorded a provision of $66,000 compared to $21,000 for the same period in 2020. The allowance for loan losses was $406,000 at June 30, 2021 and $401,000 at December 31, 2020. There were $70,000 in charge-offs and $9,000 in recoveries for the six months ended June 30, 2021 compared to no charge-offs or recoveries for the six months ended June 30, 2020. (See Note 6 "Loans" and Note 11 "Contingencies" for an additional discussion on the Company's loan portfolio.)

Non-interest Income. Non-interest income decreased $3,000 or 4.5%, to $67,000 for the six months ended June 30, 2021 from $71,000 for the six month period ended June 30, 2020. The decrease was primarily due to lower fees received on bank products and services, partly offset by an increase in income on Bank Owned Life Insurance.

Non-interest Expense. Non-interest expense increased $725,000, or 61.1 %, to $1.9 million for the six months ended June 30, 2021 from $1.2 million for the six months ended June 30, 2020. The increase was primarily due to increases in merger related expenses and data processing service fees, partly offset by a reduction in compensation and benefits expense. Merger related expenses increased $709,000, or 1,952.1%, primarily due to expenses related to the Company's announced merger. (See Note 2 "Plan of Merger"). Data processing costs increased $11,000, or 7.5% primarily due to higher core processing expenses. Compensation and benefits expense decreased $29,000, or 4.9%, primarily due to lower costs of salaries and benefits.

Income Tax Expense. We recorded a $12,000 income tax benefit for the six months ended June 30, 2021 compared to a $45,000 income tax benefit for the six months ended June 30, 2020. Income tax expense (benefit) is calculated based on pre-tax income or loss adjusted for permanent book to tax differences, such as non-taxable interest income on municipal securities, income on bank owned life insurance and non-deductible merger related expenses.

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